Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.

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The Contango Warning

President-Elect Obama is expected to name his energy and environmental team shortly. Whoever is nominated as the next Secretary of Energy will be swamped with an array of competing priorities, including modernizing the nation's electrical grid, managing the nuclear weapons infrastructure, and above all guiding the shift to a greener energy diet that will reduce our greenhouse gas emissions, and perhaps also our dependence on imported energy. With regard to the latter outcome, however, the incoming Secretary should pay careful heed to the signal that the oil market is sending about the importance of boosting declining US petroleum production. While the media focuses on a front-month futures contract price for West Texas Intermediate crude oil in the low $40s per barrel, traders have been paying north of $60 per barrel for delivery in 2010 and $80 for oil in 2016. That suggests that the relief we are seeing at the pump today is only temporary, while the global economy is gripped by a recession and credit crunch. Our oil worries will return soon enough, once the economy recovers.

Aside from the remarkably rapid drop in the price of crude oil for prompt delivery, the current market conditions are unusual because of the steep rise, or "contango", of the prices in successive futures contract months. At yesterday's settlement on the New York Mercantile Exchange, oil for delivery in February carried a $2.59/bbl premium over January, and March was another $2.20/bbl higher. Oil for delivery in December 2009 was a whopping $13.81/bbl higher than the January '09 futures. The fact that sufficient oil is not being bought today and put into storage for future delivery to close the arbitrage opportunity this situation creates is a clear indication of just how tight commercial credit has become, recently. As it is, US oil inventories have climbed by 26 million barrels since the end of September, rising from close to the bottom of their seasonally-adjusted range to near the top.

Although the oil market isn't any more prescient about future oil prices than the stock market is about future corporate earnings, it still reflects the current consensus on the future--and not just of those with an opinion, like me, but of those willing to bet serious money on it. In that light, the extreme contango of the current market reflects many factors, chief among them the extraordinary weakness of current demand that has caused prompt prices to collapse, combined with the seemingly-inevitable collision between limited global supplies and the long-term demand from the large developing economies of Asia. Even if US oil demand never returns to its high-water mark of 20.8 million barrels per day in 2005--a level 6% above our monthly average for 2008, to date--the potential demand from China and India is more than sufficient to drive prices back to OPEC's desired floor price of $75 or more. Throw in a bit of political risk from our old friends Iran, Venezuela and Russia, and it's the current price that looks like the outlier, not today's long-dated futures prices between $60-$80/bbl.

That certainly supports the case for the next Secretary of Energy to push hard for the fuel-saving technology and alternative fuels that can reduce our dependence on expensive sources of foreign oil, but it might be less clear why maintaining domestic oil production and increasing it to the maximum extent possible matters just as much. We can't escape the mathematical certainty that imports must cover the difference between demand and domestic production. Those domestic supplies, which still represent 13 times as much gross energy content as our current 10 billion gallons per year of ethanol production, and contribute more than 30 times as much net energy to our economy, remain essential. Even a modest further drop in US oil production could negate the energy security gains from efficiency and additional biofuels.

There's also a lot of money at stake for the country, not just for oil companies. A new study from ICF International, commissioned by the American Petroleum Institute, confirmed the findings of the 2007 National Petroleum Council study in which I participated, to the effect that allowing drilling on the off-limits portions of the Outer Continental Shelf, onshore federal lands, and the Arctic National Wildlife Refuge could increase US oil production by 2 million barrels per day in 2030, above the expected baseline. That would displace tens of billions of dollars per year of imported oil--even at today's low prices--while cumulatively generating hundreds of billions in state and federal royalties and corporate income tax revenue that would be very helpful in covering the enormous debts being run up combating the financial crisis and recession.

As I noted frequently during the summer's debate over offshore drilling, there's no question of drilling our way to energy independence. We urgently need to expand and diversify our energy supplies and become much more efficient in how we use energy, but that doesn't mean we can turn our backs on oil, just yet. The new Energy Secretary will have to work hard to ensure that the oil replaced by the aggressive adoption of renewable energy and efficiency technology doesn't end up being our own.

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NIMBY vs. TANSTAAFL

It is encouraging that our reaction to the current energy crisis has reached the stage at which we are beginning to see concrete plans for addressing it systematically, rather than via the grab-bag approach employed in last year's energy bill. The same applies to the related, but not quite parallel problem of climate change. But whether voters ultimately gravitate towards the Pickens Plan or to Mr. Gore's more dramatic goal of eliminating fossil fuels, such approaches are likely to run afoul of the same factors that have hampered the ability of the US conventional energy sector to keep pace with demand. Real progress in this area will require us to confront the collision between our desire for abundant energy and our distaste for the means of providing it.

The current debate over offshore drilling exemplifies many of the same obstacles that renewable energy sources will face, as we attempt to scale them up to a level that can compete with oil, gas and coal. Too many advocates of alternative energy cite our inability to drill our way out of this energy crisis--kicking a dead dog, if there ever was one--without realizing that the sensibility that opposes oil exploration off our coasts or in Alaska is not so different from the one raising lawsuits against the transmission of concentrated solar power from the desert to coastal markets.

Whether we are talking about oil wells, refineries, wind farms, or uranium mines, most Americans would prefer them to be far enough away from us that we can't see, hear or smell them. Until recently, it has been just barely possible to satisfy both our demand for energy and our state of denial about its origins, because the energy sources we have relied on are so concentrated. One mid-sized offshore oil platform contributes as much net energy production as the entire US ethanol program did in 2006. But as we shift toward renewable energy, it will become increasingly difficult to shield our sources of energy from our view. Generating the electricity necessary to displace natural gas from the power sector into transportation, as Mr. Pickens suggests, would require between 90,000 and 200,000 wind turbines, using current technology. In order the make that a reality, the viewscapes of millions more Americans must include either wind turbines or the new transmission lines necessary to bring their output to market.

Breaking this tension between NIMBY and TANSTAAFL--the popular acronym about free lunches that restates the Laws of Thermodynamics--will require a willingness to set clear national priorities and make the compromises necessary to turn them into practical reality. Does our desire to become energy independent, or at least reduce our reliance on unstable oil suppliers and the financial drain that accompanies it, exceed our preference for keeping big, ugly infrastructure out of sight and out of mind? Does our concern about the potential consequences of climate change trump the ability of small, vocal minorities to block essentially any project that doesn't fit their vision? Or has this energy crisis finally become painful enough to force us to grapple pragmatically with the consequences of solving it?

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