How would you feel if 2% of your future Social Security retirement savings went to OPEC?

Last week, our government extended the payroll tax cut until the end of the year, 2012.  The Senate approved the $143 billion measure on a 60-36 vote minutes after the House approved it in a 293-132 vote.  But we did not permit the Keystone XL pipeline to go forward.  You might ask how do the two relate. 

Social Security Payroll Tax Cut steals from the future to pay the present

While I am in favor of tax cuts, if spending is cut as well; I am not in favor of the Social Security Payroll tax cut.  This is the classic “Rob Peter to Pay Paul” trick, or “I will gladly pay you Thursday for a hamburger today.”  What makes this so thoughtless is that we are drawing down on a future savings/retirement program, which for many is their only source of retirement funds.  How this fund is to be repaid will not be painless – whether the corporations have to pay more, thereby reducing their profits and potential employment, or through payroll tax increases to offset the cuts, or some other creative accounting slight-of-hand measure the our esteemed colleagues in Congress can concoct.  In any event, let us go to the numbers.   They extended the 2 percentage point cut in the 6.2% Social Security payroll tax that would save around $80 monthly for someone earning $50,000 per year and give a maximum cut of $2,200 to high-end earners, which tops out at $106,000 per year. 

No Keystone XL pipeline – results in an increase in oil and gasoline prices

While approving the construction of the pipeline will not have a short-term impact on the price of gas at the pump, much like its predecessor pipeline from Alaska, the Keystone pipeline would secure a long-term source of non-OPEC crude products available to U.S. refineries.  Currently, global supply of crude remains tight, primarily due to political tensions in the Middle Eastern countries that are OPEC members.  All of this is taking place during a decrease in global demand for crude and its refined products. 

What has the gasoline price done since the payroll tax cut went into effect?

Since the payroll tax cut was implemented in January 2011, the Energy Information Administration (EIA), in its weekly U.S. All Grades Reformulated Retail Gasoline price database, reported that for the first week of January 2011, the average price was $3.201 per gallon.  By the last week of December 2011, the EIA reported that it was $3.413 per gallon.  By February 20, 2012, gasoline was $3.591 per gallon.  Since the payroll tax cut was enacted, gasoline is up $0.38 per gallon.    

And how does this affect the average driver?

According to the U.S. Department of Transportation (DOT) as of 2011, the average person drives 13,476 miles per year.  According to the Bureau of Labor Statistics (BLS), the average miles per gallon for a passenger vehicle is 27.5 mpg.  Dividing 27.5 mpg into 13,476 miles per year equals 490 gallons of gasoline purchased each year.  With gasoline prices up $0.38 per gallon, that translates to an additional $186 paid for gasoline per year.  Back to our $50,000 per year employee, he/she used two and one-half months of payroll tax savings to buy gasoline. Taking this one step further, if in 2011, 48% of crude oil demand is imported (before it is refined into gasoline), then $186 time 48%, or $90 (slightly more than one month’s of payroll tax savings) is being sent offshore.  Of that, approximately 44% of imported crude is from OPEC.  Approximately, $40 (44% of $90) of the 2011 gasoline price increase was paid to OPEC.  If prices go to $5.16 per gallon (not out of the relmn of possibilities), 100% of the payroll tax savings will have gone to the increase in the price of gasoline, with 18% of 100% going to OPEC. 

We are paying OPEC at the expense of our elders’ retirement plan.  Think about that.

This week representatives from countries around the world will be traveling to South Africa for the UN Summit on Climate Change.  This Summit begins on Monday, November 28 and continues through December 9.  I have several thoughts about climate change.

Climate Change – congratulations to the world for taking this on, despite the nature of the data.  Corporations around the world and individuals are making adjustments to their residential and commercial lives to reduce their carbon footprint.  Corporations and other entities are attaining positive results through a variety of means and technologies.  They are employing solar, wind, geothermal, better insulation, smarter architecture, energy efficient technology, etc. These costs are being born by them with various subsidies to encourage the adoption to the technology.  The education by these groups should be applauded.

However, I do not think that this should be mandated on an international basis.  Given the current financial and economic environment, this would be a costly endeavor.  Corporations and companies forced into reduced carbon emissions, would pass the costs onto the consumers, who can ill afford such pass-through costs at this time.

Environmental Protection Agency – again, congratulations to another environmental group.  The EPA should be basking in their glory for their efforts in changing the behavior of consumers and corporations in the US.   While the results are dated, smog levels around the country have dropped considerably because of fuel regulations on NOx and Sox reductions.  Rivers are significantly better.  Acid rain has been greatly reduced.  In fact, according to recent conversations that I have had with a farming coop, acid rain reduction has been so successful that the soil is now barren of sulfur.  Farmers must purchase sulfur and apply it with the fertilizers. 

However, they should not be constraining job growth by preventing the development of projects such as the Keystone XL oil pipeline, shale gas development with associated pipeline infrastructure or oil drilling.  The success of drilling shale gas, has been so successful that 6 years ago, we were importing 15 percent of our natural gas needs.  We had constructed LNG regas facilities along the coasts to import natural gas from Qatar and other Middle East countries.  Now, we are talking about building LNG trains to become an LNG exporter.  Who would have thought? All of this shale gas development has significantly dropped the price of natural gas that we have returned to one of the low- cost countries for natural gas.  Companies like Dow are talking about taking advantage of that cost benefit, by restarting one of their mothballed ethylene plants.  This will allow the US to bring back high paying chemical, fertilizer and petrochemical jobs that were lost when we were natural gas importers.  That will lead to more industry, more revenues and more taxes.  Many of the facilities are already built and can be brought back on line with minimal capex.  All of this has a job multiplier effect, adding support industry jobs.  Allowing us to develop these reserves provides us/US with cheaper energy, more jobs, more revenues (worth repeating), more taxes (again worth repeating), and more security (less revenues going to unfriendly countries).  This is a win-win for all of us/US.

Carbon Dioxide - lastly, DO NOT, I repeat DO NOT, all the trading companies and investment banks to trade carbon credits.  If you think that the banks and trading companies make too much money now, give them carbon credits to trade.  They will become rich beyond your wildest imagination and the government would lose out on one of the biggest paydays in history.  I propose that we allow the EPA to tax carbon dioxide emissions.  It could be pro-rated across the industries using a life-cycle apportionment.  This means that we do not shut the coal business down, because it is our greatest energy source and security of all the energy types (for now).  But the EPA would apportion some of the carbon tax to them – this would encourage the closing of high-sulfur mines, while keeping larger low-sulfur mines operating.  Utilities would then allocate capital resources across their electricity-generating portfolio and eventually close high-sulfur emitting coal-fired power plants.  While both of these industries would shed jobs, the revenues that the EPA take in from the carbon tax on emissions would be used for incentives to build low or no carbon emission, electricity generating capacity.  This should create more jobs than it eliminates.

Until next quatbtu.

Jobs, Jobs, Jobs – thar’s oil in them thar fields

The jobs are out there.  But you must be willing to go to them.  North Dakota is the place, but it is not where people normally think about.  It is cold, windy and flat, with little to no night life.  The jobs –  are working in the oil patch.  This is nothing new; as I drilled in there in the early to middle 1980s.  Back then we drilled vertical wells to 14,000 feet.  When we drilled into the Bakken and Three Forks and analyzed the formations with drill stem tests (a test the measures the oil productivity potential), it tested oil, but not at an economic rate to make it worth completing.  So, we left it behind pipe.  We all knew that at a higher price in the future, they would make nice wells.  

The future is here and now, not just because of the price, but because of the advent of technology.   Two technologies have advanced that make these formations economic – horizontal drilling and fracturing (I will come back to this in a future blog).  This has created a drilling boom and the need for all kinds of jobs – construction jobs of all kinds (residential, commercial, hotel, water tanks, oil tanks, pipeline, etc.), restaurant jobs, trucking jobs, small store jobs, waste removal jobs, mechanical jobs, etc.  The point here is that this industry, reviled by most of the nation, provides great paying jobs.  When an industry is allowed to grow, unintended consequences develop – good unintended consequences.  It does have negative unintended consequences too, like water use and waste disposal and inflation.  These are things that can be dealt with in time and with good planning.

In a previous blog, I mentioned the Keystone XL pipeline that could provide 20,000 jobs.  The complaint is that these jobs are transitory and poor for the environment.  While environmentalists are needed to make sure that the environment is not abused, practicality must be considered.  Environmentalists have become anti-job creators, but it must remembered that the job creators (energy companies) pay for their ability to be anti-job creators.  In both the Keystone XL and North Dakota cases, these jobs are well paying and will last for years.  Yes, the energy industry goes through boom and bust periods, but what industry does not.  In a recent StarTribue article, they reported that the state of North Dakota had an influx of 35,000 people willing to take those jobs listed above.  This boom started around 2005.  On the Job Service North Dakota website today, it listed an additional 17,454 job openings.  As a result of the two technologies mentioned above, oil production in North Dakota has increased from 45.424 million barrels per year in 1981 to 113.033 million barrels per year in 2010, according to the Energy Information Administration (see the EIA chart below). 

That oil production increase and oil price increase has resulted in a $1 billion state budget surplus for North Dakota.  That is worth repeating – a $1 billion state budget surplus.

WE NEED THIS TYPE OF ENERGY - STRONG JOBS AND A REDUCTION OF FOREIGN DEPENDENCE. 

Part 3 - Nuclear sense versus Solar cents

Part 3 of the Chart That Changed the Energy Picture.  The way to think of energy is in its three states of matter – gas, liquid, and solid.  Petroleum is liquid.  Natural gas is obviously gas, and coal and nuclear are solid.  Liquid energy is portable and solid energy is not (as least not in its current configuration).

If we start with solid energy at the bottom of the EIA chart depicted in the first blog  - Nuclear Electric Power bubble on the left-hand side – it supplies 8.3 quadrillion btus of the US overall power source.  If we trace the line from that bubble to the Electric Power square, we see that 100% of nuclear power goes to the Electric Power sector (representing 38.3 quadrillion btus of demand, or 40% of the total energy demanded by the US).  For the electric power sector, nuclear represents 22% of the total electricity produced in the US that is consumed. 

If we negatively alter the nuclear picture the way Germany is (see earlier blog on Germany’s Nuclear Winter), then we decrease the electricity produced from this source, thereby increasing our reliance on the other 4 inputs into the Electric Power sector – renewable energy 11% (dominantly hydropower), coal 48%, natural gas 18% and petroleum 1% (dominantly petroleum based electrical power generators).

If we assume that the US cuts electric power generation from some of its oldest nuclear power reactors, then we need to either make up the difference using the 4 inputs or decrease consumption of electricity (my choice.  The 1% contribution that petroleum makes is not likely to increase because that is used primarily in back-up electric power generators for mission critical facilities, like hospitals, internet server farms, and any national security facility.  That leaves us with increasing the use of natural gas, coal, or renewable energy.  

We have choices here.  We have now abundant, cheap natural gas and abundant, cheap coal.  As we have seen through the failure of Solyndra (approx. $535 million in Federal loan guarantees by Congress with the DOE giving up the right of first lien -what were they thinking – obviously they were not), Spectrawatt, and Evergreen Solar, the Federal Government should not be in this business.  This is why we have public and private equity markets. What is the most interesting aspect of the solar companies failures, is that despite the reputed job gains from this green energy source, the very people who can afford this are being castigated by the March on Wall Street crowd.  The corporations have also been large sponsors and purchasers of solar, yet the March on Wall Street crowd is bashing them.  The cost to the taxpayers for the not-ready-for-prime-time energy is astronomical and irresponsible.

Again I ask, where will we make up the difference in electrical generation?

Keystone XL controversy

I have watched this political development and have just sent a letter to the State Department encouraging Secretary Clinton to approve the Keystone XL pipeline.  There are several points to be made.  First, most environmentalists are on the receiving end of donations.  They make their living off of the generous contributions of everyday concerned citizens.  These contributions frees their guilty consciences.  However, they typically do not follow up on the environmentalists stances and actions.   You, the tax payer, feel their anti-business results - higher prices or more regulation.  They spend your money on preventing economic development.  They are essentially job destroyers.  Do not get me wrong, I am not anti-environmental.  I do however, believe that everything has economic consequences that must be rationalized.  This is one of those rationalizations.  Second, we import over 50% of our oil needs.  The Middle East is not going to be any safer now that the Arab Spring has occurred.  I believe that it gets worse before it gets less worse.  Take a look at what happened to Egypt over the weekend.  They invaded the Israeli consulate and are making it more difficult for tourism.  This type of action will occur across those Arab countries as they try to "find themselves" and the appropriate leaders.  Act 2 will be an Arab Spring  realizing that they will need petrodollars to run their economies and pay their social programs.  This will result in a tighter alignment with the OPEC hawks, thereby being less friendly (at least economically) to the developed and emerging market economies.  The end result is higher prices and more dependency on the Middle East.  Third, I have yet to find out what the environmentalist is for when it comes to decreasing prices, increasing employment and advancing our economy.  They tend to be short-sighted, which matches the donor cycle for whomever the work.  It generally is not in the country's best interest.  We are a hydrocarbon-based economy.  We need oil and gas, at least until we find something better.  But do not let everyone take down our energy sources without already having a backup plan.  As I read voraciously, I see  various environmental groups and citizens aligned with environmental groups saying:

• no to oil (off shore leasing and drilling, no to the above mentioned pipeline), oil represents about 94% of the transportation sector demand; 
• no to natural gas development (hydrofracing has been attacked from all angles - we imported 15% of our natural gas needs from Canada - now we don't, it is about 18% of our electricity generation); 
• no to nuclear (22% of our electricity generation); 
• no to coal (about 48% of our electricity generation, we have 100% of our needs for decades - and utilities have made strides to reduce all kinds of emissions); 
• no to hydropower (about 6% of our electricity generation);
• no to wind as in most cases they are eye sores to those who want it (but not in my backyard); and
• no to solar as some of these utilities want to construct solar thermal systems in the desert which impact the desert tortoise.  

How many jobs have they said no to in the above list?  How many tax dollars have they said no to in the above list?  How much energy security have they said no to in the above list?  Everything they have said no to will result in much higher prices, lower employment and lower tax revenues.  Do you want to pick up that tab?  Remember they are taking your money and telling you that you can not have jobs, while they keep theirs.

Germany's Energy Trade

Summer is over and it is time to get blogging.  On September 6, 2011, a Russian JV started filling natural gas into the first of two new pipelines, called Nord Stream.  Gazprom holds a 51% ownership in the JV with BASF SE/Wintershall Holding GmbH and E.ON Ruhrgas each holding 15.5%, and Gasunie and GDF SUEZ each holding 9%.   The first pipeline runs 1,224 kilometers along the Baltic Sea bottom to Germany.  This pipeline will transport 27.5 billion cubic meters of natural gas directly to Germany and from there to France, the UK, the Netherlands and Denmark.  A second pipeline (and identical to the first - 27.5 billion cubic meters capacity) to run parallel, is 54% complete and is expected to be completed by the fourth quarter of 2012.

I wrote an earlier blog about Germany shuttering its nuclear power industry by 2022, with 8 of 17 nuclear power plants to be shut this year.  The reduction of 10% of its power needs are to be made up elsewhere - where?  This may be the where.  It seems to me, someone across the pond, that Germany is trading one onerous energy source for another.  Gazprom is the world's largest producer of natural gas.  It has held Ukraine hostage in 2006 and 2009, over natural gas price disputes.  It is embarking on another as the buffer gas is being injected into the Nord Stream pipeline before commercial natural gas can be pumped.  This time the dispute is over a reduction in price and volume by Ukraine, but Gazprom has refused unless the Ukraine's state gas company agrees to merge with Gazprom.  The natural gas comes from Russia and begins its trip in Russia and is 51% owned by a Russian company.  Could disputes occur in the future with Germany?

This sounds like more of a monopolistic grasp over Europe than there was previously.  As Germany reduces its own ability to generate electricity or energy and replacing it with imported energy, safety issues are being traded for trade issues and less energy freedom; particularly, when the nuclear power industry has had a great track record, despite several accidents.  I think that the timing of Germany's nuclear decision was premature, but only time will tell.

SPR - Strategic Petroleum Reserve - release some now? Are you kidding me?

In a previous blog, I commented upon the number of lawyers operating our Congress (37% of Representatives and 60% of Senators).  On Wednesday, after OPEC failed? to increase production, Congressman Ed Markey (D-Mass. - J.D. earned in 1972) said that the US "must engage in a full-scale OPEC oil independence campaign in the long-term to reduce our dependence on foreign oil, and prepare to use the nations' Strategic Petroleum Reserve in the short-term if prices spike once again and threaten an already-teetering economy."  While I am all for a long-term energy policy, the SPR should not be used as short-term solution to what ails the economy.  According to his website (http://markey.house.gov, June 8, 2011 OPEC post), that is exactly what he wants to do.  On March 10, 2011, he introduced H.R. 1017, which would direct the Department of Energy to release at least 30 million barrels of oil from the SPR, and then replace it with refined product like gasoline or diesel fuel when prices are low to enhance the security and flexibility of the SPR.  This short-term solution will not decrease the price of gasoline enough to benefit a "teetering economy."  To be fair, Congressman Ed Markey is not the only Representative or Senator to call for the release of the SPR.  How useful is the SPR for these situations?

A few facts about the SPR need to be discussed.  First, according to the eia.gov website, the SPR currently holds approximately 727 million barrels of crude oil.  Second, according to the DOE website (http://fossil.energy.gov/programs/reserves/spr/spr-sites) all of the SPR storage sites are in deep, massive salt caverns underlying Texas and Louisiana coastline.  The caverns range in size from 6 to 35 million barrels in capacity; a typical cavern holds 10 million barrels and cylindrical in shape with a diameter of 200 feet and a height of 2,000 feet.  The reserve contains 62 of these underground caverns.  Third, SPR oil can be distributed through the interstate pipelines to nearly half of the 141 US refineries.

Source: http://fossil.energy.gov/programs/reserves/spr/spr-sites

So, how much oil is in the SPR as it relates to the people?  The EIA supplies weekly petroleum data to the market place every Wednesday at 10:30AM Eastern Time.  For the week ending June 3, 2011, crude oil input to refineries (141 refineries in the US) was 15.1 million barrels per day.  If we used the SPR to replace that 15.1 million barrels per day of supply, then we would deplete the SPR in 48 days.  This clearly is not a go short-term solution.

OK, that will not happen because we produce a portion of that - 5.6 million barrels of the 15.1 million barrels per day total, or 37%.  For the week, we imported a net of 8.6 million barrels, or 56% of our needs.  AGAIN, WE IMPORTED 56% OF OUR NEEDS.  If we used the SPR to replace our imports, then we would deplete the SPR in 85 days.  Again, this is no short-term solution.

If we were to use the SPR to replace what Libya is not producing, according to the EIA Libya Country Analysis Brief, an estimate of 1.8 million barrels per day, then we would deplete the SPR in 403 days.  Gasoline prices for the month of May averaged $3.96 per gallon.  Just for contrast, across the EU, the average cost of a gallon of gasoline is about $8.70 (most of which is tax).  The SPR should not be used for anything less than a catastrophic event, such as the bombing of the Saudi Ras Tanura or Jeddah refineries.

So, how long would it take to get Congressman Ed Markey's 30 million barrels of oil to be released, or 4% of the total SPR?  Refining capacity for the week ending June 3, 2011, was an average of 87.2 percent of operable capacity from our 141 US refineries (Gulf Coast was at 92.0% capacity - the high, and East Coast was at 71.0% capacity - the low).  The latest, highest operating rate was 95.8% in May of 2003 and the all-time high operating rate was in August 1998 of 99.9%.  Operating at the highest rates with high temperatures for a long period of time is never a good idea.  If we used 95% as a more sustainable rate, then the refining complex of 141 refineries with an operable refining capacity of 16.994 million barrels per day, then we can achieve a 16.1 million barrels per day capacity.  At current levels of refining, we could only add an extra 1 million barrels per day of capacity.  That means that assuming that the SPR could deliver oil to the refinery on day one, we would blast through that Congressman Ed Markey's 30 million barrels release in 30 days.  What kind of impact would that really have on prices?  Not much!

Think wisely and act rationally.