RSS Feed MenuUnlike banking and automobiles, the domestic US energy industry has actually come through the current economic turmoil in decent shape. Unfortunately when you are a reasonably healthy industry in a sickly economic environment, and the government is hungry for revenue to support all the charity cases, that makes you a target. So it’s no surprise that, in its new budget, the Obama administration comes after the energy industry.
The administration says it plans to raise over $36 billion in new revenues by eliminating what it calls “subsidies” for domestic oil and gas production. The stated reason: “Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices.”
The invaluable Robert Bradley Jr. at the Institute for Energy Research in Houston has the best take on the incredible contradiction that lies at the heart of that statement:
Both of these points flatly contradict the whole philosophy behind the White House’s favored cap-and-trade scheme, which is expressly designed to (a) raise the price of fossil-based energy and (b) reduce the incentives to use such energy sources. The White House can’t have it both ways: Do they want higher energy prices (cap-and-trade) or don’t they? And do they think government policies influence energy production, or don’t they? If they claim tax hikes on the oil and gas industries won’t have any incentive effects on production or jobs, then how can they claim that “green investments” will create jobs in the solar and wind industries?
The whole point of cap-and-trade, after all, is to drive oil and gas prices north, so we use less. Energy Secretary Steven Chu is on record as supporting driving gasoline prices to European levels. Obama himself said duing the 2008 campaign that his main problem with the dramatic run-up in energy prices that year was related more to pace than to general direction. Now, all of a sudden, they’re worried about increased energy costs?
And “subsidies?” Pardon me while I clean the coffee that spurted from my nostrils onto the computer screen when I read that one. Allowing companies to expense their major investments – oil drilling platforms, etc. – over a period of a year just makes good sense. Energy companies pay plenty of taxes at all levels of government, and whatever “subsidies” they might receive to provide the American people with reasonably priced energy pale in comparison to what has been handed to the banks or the automobile companies.
These are tax increases on domestic oil and gas exploration and production, plain and simple. If they were to pass, the energy companies would simply move their exploration activities overseas. (Maybe to sunny Libya?)
In all likelihood, of course, these tax increases will not be imposed. Congress has repeatedly blocked such efforts in the past. Nevertheless, a number of months ago, I predicted that the likely result of the Obama so-called energy policy would be increased oil imports from overseas, as domestic production falls further and wind and solar prove a bust. I see no reason to change that projection.
balconesfault // Feb 2, 2010 at 9:59 pm
One add – I didn’t say I favor eliminating the deduction for depreciation expense. I said that it represents a government intervention into the marketplace. Unlike some, I’m ok with the government intervening in the market when it suits our national interest. We should just be aware that’s what it’s doing.
balconesfault // Feb 2, 2010 at 10:42 pm
16 sdspringy // Feb 2, 2010 at 6:19 pm
This is NOT how wind works. It does not replace coal generation. As you have accurately stated wind only functions 35% of the time.
No – it’s not that wind only functions 35% of the time. It’s that the annual average output is 35% of rated capacity. Yes, there will be times when the wind won’t be blowing … but there will also be plenty of times when the wind is blowing 7 mps instead of 12 mps, and so a turbine might be producing 60% of max capacity.
A coal plant operates 97% of the time, no wind required. So if you have to have a reliable source of generation, that will not be wind, its only available 35% of the time. You want your electical needs met 35% of the time, no think so.
You really don’t seem to appreciate our modern electrical grid system very well. A large system operator like ERCOT here in Texas considers a number of inputs – stable load from nuclear and coal, load from wind and solar that varies with climactic factors, and peaking capacity that mainly comes from natural gas fired plants which can be quickly ramped up to meet demand.
But guess what – demand isn’t constant either. If all you had was your coal plant, you would still be forced to vary the output greatly over a 24-hour cycle. So even without wind and solar you’re still going to need those peaking plants to ramp up power delivery at 4 pm on a hot day when everyone has their AC cranked to the max.
So ERCOT does a LOT of calculations and figures out an expected power generation capacity from the nukes in the state, which are ideal because they provide the cheapest base load KWs. Then they look at meterological predictions and figure out how much wind and solar they’re expecting on the grid that day, and the time phasing across the state (ok, at this stage they don’t yet pay much attention to solar since it’s not yet significant). They figure out what rate the coal plants need to be firing at through the day to make up the difference. And they keep the natural gas plants – the most expensive per kW operating cost – at an appropriate level to supply localized portions of the grid that might be constrained during the day and on ready stage to add to the grid if that big wind that was coming down from Oklahoma suddenly stalls out or (in the future) a sudden cloud formation causes a drop in solar (although those cloud formations also reduce the need for AC in big office buildings).
It’s a complex system. But because of the complexity of the system, and the resources that have been put into managing it, there is also a substantial reduction in the amount of coal that needs to be burned. The electrons are going to good use.
So what happens is they build wind only if there is already a base of coal or hydro generation.
Well, no. They build wind because … well … it saves burning fossil fuels.
We delay building new coal or nuclear at our own peril, wind cannot meet the demand.
Responsible utilities are already looking at how to phase out coal burning, as it is such a bad environmental actor. Highest greenhouse gas output per BTU, not to mention lots of nasty metals pumped into the atmosphere, not to mention the environmental blight of mountaintop removal mining. We’re stuck with coal for awhile for a lot of reasons, but for a lot of reasons we’re looking for better alternatives.
Also with all that new wind there was not the cooresponding large increase in labor, or jobs. Wind is a myth for both reliable source of electrical generation and for supply jobs.
There is a sizable workforce engaged in constructing wind farms in this country. Installing solar is actually more labor intensive, and we will see even more jobs in that going forward.
Again, saying that wind energy is not a reliable power source simply represents a lack of understanding of how complex electrical grids of today work. But then again, there’s a reason why only 5% of scientists identify with the Republican Party.
And here it is from the administration’s mouth:
The administration says it plans to raise over $36 billion in new revenues by eliminating what it calls “subsidies” for domestic oil and gas production. The stated reason: “Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices.”
OK.
As stated subsidies do little to incentivize production whether oil or electical energy, subsidizing wind will not reduce energy cost nor provide energy jobs..
Actually, subsidizing wind does provide energy jobs, despite your claim – and will reduce energy costs in the long run. Every MW generated from wind represents a MW that does not have to be generated from coal, oil, or natural gas (as I said before, we keep the nukes ramped up as high as we can keep them). Every ton of coal, barrel of oil, or scf of natural gas that is not burned to generate power incrementally reduces the price of that commodity. Wind power generation actually reduces the amount we will pay for fossil fuels over the long haul.
LFC // Feb 2, 2010 at 10:43 pm
teabag said… We need Nuclear to start NOW. It should have been expanded and built on years ago.
There are a few reasons we stopped building nuclear. First, the disasters of Three Mile Island and Shoreham. Second, no nuclear power plant has been built in this country for less than double the quoted price. Third, what to do with the waste? Finally, we have a bad case of NIMBY in this country.
The French are kicking our asses in nuclear power because of their socialist nature. The government approved a standard plan for nuclear plants. They put up multiple identical plants, instead of the pile of expensive one-offs that we have in this country. (200 years after Eli Whitney and the nuclear industry STILL doesn’t grasp the concept of interchangeable parts.)
This is a perfect place for government intervention, and a terrible place for letting the market try to figure things out. Allow submissions from private industry for a standard power plant plan, pick a winner, let the winner license it for a fair price to all, and build a bunch of identical freakin’ plants. Parts, repairs, and maintenance become standard. Safety regulations become standard. Workers trained at one plant are able to pick right up at another. But despite all these uncontestable advantages, can you imagine the Republican howls if Obama proposed that the gov’t pick a standard?
balconesfault // Feb 2, 2010 at 10:58 pm
sinz
I said ENERGY needs, not just ELECTRICITY needs.
I know that. I also know that 20% of our electricity needs is more than a few percent of our energy needs.
Electricity represents only about one-third of U.S. energy needs. Two-thirds are taken up by transportation, which is 99% based on fossil fuels.
A percentage which we can expect to steadily drop in the future.
And the Department of Energy assumed (correctly) that we’re not going to have 200 million electric cars and trucks on the road by 2030.
No, but I’ll bet that by 2030 we have at least 50 million electric cars and trucks.
And I doubt we’re ever going to have electric-powered jetliners.
There I agree with you. And that’s one of the things that pisses me off most about the drill baby drill, and buy Hummers! crowd. Because the one thing that we really need oil for way into the future is aircraft fuel, at least until we develop the synthesis processes to use energy to create replacement liquid fuels. And burning it willy nilly to move boxes on wheels that could be converted to electrical use way as a long-term plan seems to be disrespectful of our future generations.
Carney // Feb 2, 2010 at 11:01 pm
It doesn’t matter whether oil is “foreign” or “domestic” – it ALL enriches our enemies, it all funds the Iranian nuclear program, buys Explosively Formed Penetrators mines that pierce our vehicles’ body armor and kill our fighting men, etc etc. Oil is fungible, and the world oil market acts in effects as a unified entity, with every producer contributing to a common pot, and earning its proportion of the total sales. Buying American-drilled, American-refined, American-shipped, and American-sold oil still funds the war against us because it takes that oil off the world market, makes oil that much scarcer, and enables our enemies to charge that much more for the oil they sell.
The ONLY solution is to get off oil, completely. The most affordable, practical, fast, ready now plan for this is in former NASA rocket scientist and nuclear engineer Robert Zubrin’s book “Energy Victory”.
sinz54 // Feb 3, 2010 at 9:51 am
LFC: Third, what to do with the [nuclear] waste?
We should do exactly what the French did–reprocess it into more fuel.
The U.S. abandoned nuclear reprocessing in the 1970s for stupid political reasons. At the time, certain intellectuals were urging the U.S. to set a good example for the rest of the world by abandoning nuclear reprocessing, which as you know can also be used to reprocess civilian-grade nuclear fuel into weapons-grade plutonium, something we feared that the Third World would start to do. So we abandoned it. But the Third World continued to build nuclear weapons anyway. In 1981, President Reagan lifted the ban on nuclear reprocessing–but neither he nor any subsequent President provided the funding needed to jump-start reprocessing.
So here we are, in 2010, still setting that good example by crippling our own nuclear industry. Do you think that India, Pakistan, and Iran are impressed? I don’t.
sinz54 // Feb 3, 2010 at 9:55 am
balconesfault: I’ll bet that by 2030 we have at least 50 million electric cars and trucks.
Not a chance.
Electric cars can never compete with liquid-fueled cars for convenience.
When I lived in New York City, I had to park my car in the street outside my apartment building, since it had no garages. When I bought a condominium in the suburbs, I had the same thing–a big parking lot for cars, rather than my own garage. Only Americans who own houses (or at least townhouses) have their own garages for their cars.
Unless every city, town and suburb are going to emplace charging stations on every American street, recharging the batteries in an electric car is going to be a time-consuming, inconvenient task. Because it takes hours to recharge the batteries. Nobody is going to go to a service station once or twice a week and sit there for hours. And nobody who wants to drive their car for a long trip is going to stop every 500 miles or so and charge the batteries overnight.
balconesfault // Feb 3, 2010 at 1:18 pm
Unless every city, town and suburb are going to emplace charging stations on every American street, recharging the batteries in an electric car is going to be a time-consuming, inconvenient task.
Yes, because the free market is always unwilling to invest in infrastructure when there is a profit to be made.
And given the time window we’re talking about, there are lots of different technologies that will play out. The Danes right now are engaging in a massive project to standardize an electric car with a lift out/drop in battery, and robot-operated change-out stations where a driver can pull in and within minutes have a fully charged battery dropped in.
Given your embrace of nuclear technology developments, and military weaponry developments, and way-far-off technologies like microwaving power from solar satellites back to earth, your unwillingness to wrap your head around some very simple infrastructure changes is remarkable.
ltoro1 // Feb 3, 2010 at 6:43 pm
Balconesfault, okay fair enough you are not necessarily in favor of eliminating the deduction of depreciation expense. Just for the sake of accuracy let’s try to clear up some of these terms. Depreciation expense is really not a deduction (the term I used) or a credit (your term). I leave the discussion or the difference between a tax deduction and a tax credit for another time. Depreciation is the expense recognition for property, plant, and equipment. A component of net income for the financial statements, taxable income for income taxes.
Buildings are one of the very few depreciable assets that actually increase in value. Land, while it may go up in value, is not depreciable for either financial statement purposes or tax purposes. In most cases the value of an asset goes down as it is used. It would not be inaccurate to say that it is being consumed. It’s just consumed over a period of time that is longer than one year or one accounting cycle. For example, a truck purchased by UPS to make deliveries is capitalized at cost and is depreciated over its useful life for both for both financial statement purposes or tax purposes. Note that useful life and/or the amount depreciated per year may be different for financial statement purposes or tax purposes. Generally, we would expect the value of this truck to be less at the end of its useful life than it was on the day it was acquired. In the event the asset is disposed of at a price greater than its carrying value or basis (original cost less accumulated depreciation) you would have a taxable gain. For a C corporation the gain would be taxed at their corporate tax rate, for sole proprietors or pass-through entities (S-Corps, LLCs, LLPs, partnerships) the gain would flow through to the individual owners. Ironically, if you were not allowed to depreciate an asset for tax purposes your basis in the asset would be higher resulting in a lower capital gain (possibly even a capital loss), resulting in a smaller tax liability.
It really does not matter that the same asset can be depreciated by more than one entity at different times. Each entity can only depreciate an asset based on the cost they incurred to acquire it. In the example of the UPS truck, if it were acquired by UPS at $40 depreciated over its life to $15K and sold a different delivery company for $15K, the second company could only depreciate up to $15K.
Also, buildings which may increase in value over time, (current real estate bubble burst notwithstanding) will have wear and tear that needs to be accounted for over time. I would wager that a 40 year old building would require significant renovations. If these renovations either increased the value of the buildings and/or its useful life, they would also have to be capitalized and depreciate over time rather than expensed immediately.
Carney // Feb 3, 2010 at 10:25 pm
You all are ignoring alcohol fuel, such as methanol and ethanol. Transitioning to that is much easier and more practical than to any alternate fuel.
ltoro1 // Feb 4, 2010 at 7:01 am
Carney, I haven’t made up my mind on biofuels. On one hand they actually work and are simple to manufacture. My 18 year old brother has succesfully made biodiesel for example, but I do not know we have the capacity to actually replace petroleum. I would assume we would need genetically modified crops to do it.
balconesfault // Feb 4, 2010 at 8:06 am
It really does not matter that the same asset can be depreciated by more than one entity at different times. Each entity can only depreciate an asset based on the cost they incurred to acquire it.
Thanks for the excellent presentation. I actually wasn’t aware that you have a taxable gain if the asset is sold for more than original cost less accumulated depreciation.
sinz54 // Feb 4, 2010 at 12:03 pm
balconesfault: The Danes right now are engaging in a massive project to standardize an electric car with a lift out/drop in battery, and robot-operated change-out stations where a driver can pull in and within minutes have a fully charged battery dropped in.
Oh, brother.
Denmark: 43,100 square kilometers
United States: 9,827,000 square kilometers (228 times the area of Denmark)
Denmark: 2.3 million cars
United States: 254.4 million cars (110 times the number of cars in Denmark)
I was an engineer long enough to know that what works on a small scale doesn’t work on a big scale. Every order of magnitude increase involves qualitatively new considerations.
Building ONE highway was easy. But building the Interstate Highway System took 25 years.
In this case, you would have to standardize and freeze the design of batteries (especially form factor and power output) quite early, or else they won’t be interchangeable among all models of cars and trucks from now on into the future. (The nice thing about today’s gasoline is that just three grades of gasoline handle all makes and models of cars.)
If you standardize too early, you may bet on the wrong horse, like direct current, the Space Shuttle, BetaMax, DVD-HD, etc.
We are nowhere near being able to devise a standardized and ubiquitous infrastructure for electric cars. Not to mention the fact that America is so bankrupt on a national scale, with debts in the trillions of dollars, that we can’t afford to remake our society from top to bottom, as the Danes are planning to do.
For the next 20 years at least, the vast bulk of America’s cars and trucks will still be powered by fossil fuels. We ought to do research & development on electric cars. But no one should commit to that yet because the technology to do it for a nation as vast and transportation-intensive as America does not yet exist cheaply.
balconesfault // Feb 4, 2010 at 3:47 pm
Denmark: 43,100 square kilometers
United States: 9,827,000 square kilometers (228 times the area of Denmark)
Well, nobody is going to make the pitch that electric cars will be the vehicle of choice in Wyoming, or Montana, or Nebraska, or Idaho, or Alaska.
I’d imagine we’re more likely to see this development not across the nation, but in the more high density states, as well as high density metro areas in states with uneven population distribution.
The population density of Denmark is 128 persons/km2. The combined population density of New Jersey, Rhode Island, Connecticut, Massachusetts, Maryland, Delaware, New York, Pennsylvania, Ohio, Florida, Illinois, California, Indiana, Virginia plus DC is pretty comparable – at 101 persons/km2 – and represents a market of 144 million people, as opposed to 5.5 million Danes.
Not to mention the fact that America is so bankrupt on a national scale, with debts in the trillions of dollars, that we can’t afford to remake our society from top to bottom, as the Danes are planning to do.
Well, that was kind of the Chicago School plan, wasn’t it?
ltoro1 // Feb 4, 2010 at 7:08 pm
Thank you for the compliment balconesfault.
balconesfault // Feb 4, 2010 at 7:28 pm
Thank you for the compliment balconesfault.
I like learning new things. There’s no value in ignorance.
ltoro1 // Feb 4, 2010 at 10:04 pm
I agree, knowledge truly is power.
Carney // Feb 5, 2010 at 9:45 pm
ltoro1 said, “Carney, I haven’t made up my mind on biofuels. On one hand they actually work and are simple to manufacture. My 18 year old brother has succesfully made biodiesel for example, but I do not know we have the capacity to actually replace petroleum. I would assume we would need genetically modified crops to do it.”
LToro1, read the book “Energy Victory” by former NASA nuclear engineer and rocket scientist Robert Zubrin or visit his website at EnergyVictory.net.
You’re right that ethanol can’t by itself replace petroleum, but together with methanol it can.
Methanol can be made from natural gas, coal, or any biomass without exception, including crop residues such as stems leaves, and cobs (multiplying the per-acre alcohol fuel yield of corn ethanol farms); fast growing weed plants such as kudzu and water hyacinths; even trash and sewage.