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Congress finds a new role for the Strategic Petroleum Reserve: political piggy bank

Apparently, there is such a thing as a free lunch in Congress. It’s called the Strategic Petroleum Reserve.

The SPR, as it’s known, consists of about 700 million barrels of oil stored in four underground salt domes along the coast of the Gulf of Mexico. It was created in the wake of the Arab oil embargo in the 1973-74, and designed to serve as weapon against the kind of disruptions that resulted when OPEC started using crude as a political tool 40 years ago.

Of course, the domestic shale boom has reduced the likelihood of those disruptions. The SPR now holds 137 days worth of oil imports – significantly more than the 90 days the International Energy Agency says developed countries should have – and concerns over scarcity of crude have diminished.

So Washington has found another purpose for the SPR: Piggy bank.

In May, the House Energy and Commerce Committee approved selling oil from the reserve to raise $5.2 billion to fund the 21st Century Cures Act (developed, not incidentally, by the panel’s chairman), a measure that would streamline the Food and Drug Administration’s approval process for new drugs.

Then last week, the Senate came up with a plan to sell 101 million barrels of crude from the SPR to generate $9 billion that would help pay for a new highway bill.

I want to look at this political sleight-of-hand from two perspectives: legal and economic.

Regarding the former, the law says that a drawdown and sale of oil from the SPR cannot be made unless the president has determined that such actions “are required by a severe energy supply disruption or by obligations of the United States under the international energy program.”

It goes on to state that a “severe energy supply disruption shall be deemed to exist if the President determines that (a) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (b) a severe increase in the price of petroleum products has resulted from such emergency situation; and (c) such price increase is likely to cause a major adverse impact on the national economy.”

So prices are plummeting, output is growing, and the only adverse effect to the economy right now is the result of sub-$50/barrel oil. That’s not even close to fitting the statutory criteria for a drawdown and sale. And to state the obvious, neither an FDA regulation nor a highway bill strikes me as constituting a “severe energy supply disruption.” But maybe Congress has a different definition.

It’s the economic argument, though, that’s a bit laughable.

The $5.4 billion that would be generated to fund the House bill is based on a crude oil sale price of $84/barrel; the $9 billion on the Senate side assumes $89/ barrel. This past Friday, the U.S. benchmark settled down 31 cents, to $48.14 per barrel, the lowest settlement since March. Prices fell 6 percent last week alone.

Which leaves me wondering where Congress, in its infinite wisdom, plans on finding the extra $40 per barrel that right now just isn’t there – and isn't going to get back there in the foreseeable future. Am I the only who is concerned that the people we depend upon to make budgets, pay the nation’s bills, and fund government programs can’t do simple math when it comes to crude prices?

I’m not strictly opposed to a drawdown and sale, and I certainly don’t think the SPR is sacred. But a little logic ought to prevail here.

The Department of Energy has estimated it would take between $1.5 billion and $2 billion to maintain and modernize the reserve and ensure it has the pipeline capacity and capability to get emergency oil where it needs to be. If we’re going to sell the crude, that’s where the money ought to go. And a $48/barrel environment probably isn't the best climate to sell it.

Of course, those arguments are likely to fall on deaf ears in Washington. Because Washington seems to be the only place in the world where a vital strategic energy resource can be mistaken for an ATM.
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In Iran nuclear deal, White House energy policy contradictions continue

The Obama administration, which has so frequently spoken from every possible side of its mouth on energy, has now done it again.

The nuclear deal announced last week will lift economic sanctions on Iran, likely in the next six or so months, and allow it to flood the global market with oil. How much, and when, is a matter of some disagreement. Last month, the Iranian oil minister said the country could start exporting 400,000 barrels per day relatively quickly, and 600,000 more bpd after about six months. That’s probably optimistic.

Goldman Sachs has put the number at 200,000 to 400,000 bpd next year in addition to somewhere between 20 million and 40 million barrels now in floating storage. A consensus is emerging among analysts that the first Iranian oil will hit the market in 2016, and total anywhere from 300,000 to 700,000 bpd.

Output estimates aside, there is also a question as to how fast Iran can ramp up production. Many believe it will need from $50 billion to $100 billion in foreign investment in order to return to pre-sanction levels.

But regardless of volume and timing, there’s no doubt Iran is going to start exporting, and that will impact the global market, and the effect won’t be good. Do the math:

Iran has 158 billion barrels of crude, the fourth-largest reserve in the world. It wants to ship into a market that is already oversupplied by roughly 2.5 million bpd. Something has to give.

It will likely be prices.

The Energy Information Administration has forecast that crude prices could drop $15 per barrel once Iran re-enters the market. If drillers think profits are tough at current prices – which were just under $60 last week – then it’ll be even tougher to make money when they’re at $45.

All of which brings me, at least from the perspective of domestic energy policy, to what is the most contradictory aspect of the nuclear deal – and one of the more glaring examples of this administration’s contradictory policies.

I have written before about the absurdity of the current ban on exports of U.S. crude, a law that is more than 40-years-old and archaic in terms of both intent and relevance. That absurdity is compounded by the fact that the White House is willing to allow Iran – a country whose interests are not exactly in alignment with ours – to sell its oil internationally while denying the same opportunity to U.S. producers, who have created jobs and generated revenues across the nation.

To paraphrase Sen. Lisa Murkowski, the administration seems to find it acceptable to lift sanctions on Iranian oil exports while keeping them in place on U.S. producers. That’s just ludicrous.

Then again, maybe I shouldn’t be so surprised.

After all, this is an administration whose Treasury secretary once said that low oil prices are a “net positive.” And the president himself went to Brazil a few years ago, promised U.S. “technology and support” to help develop its oil reserves, and said that when the country was ready to start exporting oil, “We want to be one of your best customers.”

In other words, they think it’s okay to support the energy industries of other countries at the expense of our own. Well, it’s not. And the sooner Washington comes to that conclusion an ends the export ban, the better.
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Activists willing to bankrupt cities over fracking bans. This is community concern?

I have written in the past about how environmental politics is sometimes more important to activists than smart environmental policy. A recent report from Reuters more than confirms my point.

It was about an organization that’s behind efforts to enact local ordinances banning hydraulic fracturing; to date, the group has pushed prohibitions in 18 communities in six states. In the course of the story, the Pennsylvania-based lawyer who founded it said this:

“If a town goes bankrupt trying to defend one of our ordinances, well, perhaps that's exactly what is needed to trigger a national movement.”

Really? It’s all right to risk basic services – law enforcement, fire protection, education, health care – for a political position that more and more courts across the country have said is illegal?

That makes no sense.

At least the leadership in Denton, Texas, had the wisdom to walk back the city’s ill-advised ban in the wake of potential legal costs that would have gone well into six figures. And Mora County, New Mexico, repealed a fracking ordinance written by the same environmental group in the Reuters report after a federal judge ruled against it.

But still, some communities press on.

Lafayette, Colorado, for example, has already spent $60,000 defending a so-called “community bill of rights” that even the city has acknowledged won’t hold up in court. Grant Township, Pennsylvania – which has a total budget of just $250,000 – is being forced to use taxpayer dollars to defend an anti-fracking measure whose legality it knew would be in question.

Let me be clear: Local ordinances targeting the oil and gas industry are unconstitutional. They violate the Fifth Amendment, which prohibits government from taking away private property for a public cause without “just compensation.” And they run counter to a 1992 ruling in which the U.S. Supreme Court determined that the “takings” clause also requires government to compensate owners if it enacts rules that destroy the economic value of their property.

Moreover, municipal bans supersede laws that typically grant regulatory authority to the state. They also put the rule-making process in the hands of local officials who don’t possess the necessary technical expertise, and who are more likely to be swayed by the rhetoric and zeal of activists. That is a recipe for policy disaster.

But having said all that, if local governments want more control over hydraulic fracturing and other oil and gas operations, they need to go to their respective legislatures to change the laws. Statehouses, not courthouses, are the appropriate venues for this fight. And – despite activists who don’t seem to care – they won’t go bankrupt doing it.

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Live, from New York, it's fracking policy absurdity

Two bits of news out of New York over the past couple of weeks have spotlighted the contradictions, inconsistencies, and lack of logic that are characteristic of anti-drilling arguments.

The first came in late June, when the state officially imposed a permanent ban on hydraulic fracturing. Widely seen as more of a political move than sound policy, it was a product of bad science.

Much of the rationale was based on research out of Colorado that attempted to link fracking and birth defects. But here’s the problem:

Colorado regulators rejected the study and its findings. The day the report was made public, Dr. Larry Wolk, head of the Colorado Department of Public Heath and the Environment, warned that the public could be “easily mislead” by the research; that health officials disagreed with many of its “specific associations”; and that researchers ignored factors other than natural gas drilling that could have affected the findings.

Bad science aside, Joseph Martens, head of the New York Department of Environmental Conservation, said in a statement accompanying the formal ban that fracking poses “significant adverse impacts to land, air, water, natural resources.” Apparently, he didn’t get the memo about a new study from the Environmental Protection Agency that basically confirmed the process, done right, is safe.

(Not incidentally, Martens left his position shortly after the ban was put into place. He went back to work for an environmental organization that received money from the Park Foundation, an under-the-radar group that has financed anti-fracking initiatives across the state.)

But when the fracking ban is combined with the second piece of news, it becomes painfully clear just how farcical New York’s policy is.

Shortly before the prohibition was formalized, the state released its 2015 Energy Plan– a plan that actually touted natural gas consumption and forecast that its use in power generation would increase 32 percent by 2030, to 554 trillion Btu.

It also said that New Yorkers have seen their power bills decrease because of gas usage and that lower commodity prices for natural gas could cut carbon dioxide emissions by 2.4 million tons.

So, New York’s Energy Plan notes that natural gas consumption will keep increasing and says that gas delivers tangible environmental and economic benefits. Yet the politicians and their activist allies have successfully implemented a ban on the process that has made those advantages possible, instead opting for imports; 97 percent of the state’s supply comes from other producing regions.

In other words, New York is supporting job creation, increased tax revenues, and economic investment in other states at its own expense. It makes no sense.

Once the New York fracking ban was put in place, it started a 120-day clock for filing lawsuits challenging the prohibition. There is some agreement that at least one challenge will likely emerge. If policy absurdity were actionable, there would probably be a lot more.



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Is the tide turning in favor of fracking?

Last week, I noted that a number of towns in Colorado have adopted resolutions and language supporting the oil and gas industry. Earlier this year, Texas and Oklahoma passed laws prohibiting municipalities from banning hydraulic fracturing. This past Tuesday, a federal judge in Wyoming put the brakes on the Obama administration’s rules for fracking on federal lands.

All of which raises an interesting question: Are fractivists beginning to lose the war? The Washington Times seems to think they might be.

“In a development that has caught both sides by surprise, the legal and political momentum these days appears to be running against the anti-fracking cause,” the paper reported. “In states where the revolutionary oil- and gas-drilling technique actually is being employed in a significant way, the movement is losing ground.”

I’m not sure the industry can declare victory just yet, but there’s no denying that events of the past few months have started to swing in fracking’s direction:
  • A report from the Environmental Protection Agency concluded the process has no widespread impact on water.
  • Denton had to repeal its fracking ban in the wake of a new Texas law that effectively rendered the municipal ordinance unenforceable.
  • Colorado Gov. John Hickenlooper detoured an activist-driven effort to put anti-drilling initiatives on the November ballot, and state courts have, for the most part, struck down bans.
  • Voters in Youngstown, Ohio, rejected a proposed fracking ban for the fourth time last November, defeating it by 15.7 percentage points – the largest losing margin yet.
  • Voters in Santa Barbara, Calif., killed a ban by 30 points, 63 percent to 37 percent, and Gov. Jerry Brown – hardly a poster child for conservative causes – has said that a ban “doesn’t make a lot of sense.”

Of course, environmentalists will counter that statewide bans are in place in Maryland, Vermont, and New York, and make the case that two California counties did, in fact, approve prohibitions last November.

But they won't tell you that New York’s decision was a product of truly bad science, and that the bans in Vermont and Maryland were of little significance because neither state produces energy from fracking. As for the California counties that passed bans, there’s no record of any drilling activity in either.

In other words, where anti-oil and gas initiatives have succeeded, they have been largely symbolic, relatively meaningless, and exercises in activist public relations rather than substantive policy-making.

As I said above, none of this should have the energy industry taking a victory lap. Activists are nothing if not resilient, and they have vowed to keep coming back in some communities where the bans keep failing. But I do know this:

If hydraulic fracturing were a danger to human health and environment, statehouses and courthouses – and even the White House – would be on a mission to choke it with regulations. Yet no legislation has passed. Courts are tossing the bans. And EPA says the process, done right, doesn’t taint water.

While that may not qualify as a triumph, it’s enough to give us hope that rhetoric is giving way to responsibility in the drilling debate.
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