Fossil Fuels

Current History, Volume 122, Issue 841: 69-74

The United States is the world’s top producer of oil and natural gas. Its decision to either continue at this pace or curb production to achieve its climate goals will have global consequences.

As oil rigs and coal plants churn on, national emissions targets grow increasingly disingenuous and infeasible. To prevent the worst implications of the climate crisis, it is time to target the supply side of the world's dirty fuel addiction. 

BRI's fossil fuel investments will make combatting climate change more difficult. The U.S. needs to offer developing nations an alternative means of acquiring clean energy.

Nigerian lawmakers are seeking passage of a Petroleum Industry Bill (PIB) that would reorganize the oil industry. Since the establishment of civilian government in 1999 after a generation of military rule, repeated attempts at passing a PIB have been made. But the government, the political class, and the industry's leaders (foreign and domestic) have never reached a consensus that would make the reordering possible of such a crucial industry. The technical issues are exceedingly complex. Uncertainty around the bill has contributed to low levels of new investment in the industry.  However, against the backdrop of low international oil prices, the worldwide move away from fossil fuels, and pervasive security and other crises in the country, the Buhari administration appears to believe that passage now has a good chance. More generally, anecdotal evidence suggests that the political class has recognized that oil is likely to be less important in the future than it has been in the past. Oil and natural gas are the property of the state. They are exploited in partnerships and joint agreements between the government-owned Nigerian National Petroleum Corporation (NNPC) and privately owned oil companies, both international (such as Agip, Total, Shell, ExxonMobil, and Chevron) and now numerous small Nigerian firms. In part because of security issues in the oil patch—including attacks on oil facilities reflecting an alienated population—about half of all oil production is offshore. Oil and gas are a relatively small percentage of Nigeria's economy and employ few but are nonetheless central to government revenue. Revenue from oil provides about 65 percent of government revenue (as of 2018), and securing and maintaining access to it is an essential driver of political-class behavior. Further, successive Nigerian governments made use of below-market-price oil to expand the country’s political influence, especially with member states of the Economic Community of West African States (ECOWAS). Hence the PIB is a profoundly political document, with winner and losers.  Earlier in this century, oil was at the center of the Washington-Abuja bilateral partnership. The United States typically purchased about half of Nigeria's two million-barrels-per-day production. Further, successive military and civilian governments assured Washington that in the event of a cut in Middle Eastern oil because of a political crisis, Nigeria would do what it could to increase its own production. (Nigeria's capacity to increase production was limited, but the commitment to do so was important politically.) Hence, in those days, a PIB was closely watched in Washington and in American board rooms. Now, however, the United States imports almost no oil from Nigeria, the result of domestic fracking and the expansion of oil production in the Western hemisphere. That reality reduces the political significance for Washington of a PIB—though not for the big American oil companies active in Nigeria. Nigeria now sells oil that once was bound to the United States to India, Indonesia, China, and elsewhere in Asia.  Will the Buhari administration succeed in passing a PIB? The chances would appear to be good for the passage of some sort of legislation. But what the new bill will actually mean will depend on the details—and also on the institutions and schedules required for its implementation. Hence a passed PIB is not over "until the fat lady sings."

According to the Nigerian army, a ransom of $300,000 was paid to pirates in the Gulf of Guinea to secure the release of the crew of a Chinese fishing boat. The party that paid the ransom is not reported. The most likely possibility is that it was the Chinese company that operated the fishing boat. The episode sheds some light of the murky operation of kidnapping and ransom payment in the Gulf of Guinea. The Chinese fishing boat was registered in Gabon. The crew consisted of six Chinese, three Indonesians, one Gabonese, and four Nigerians. The crew was held captive for about a month. A maritime security expert was cited as saying that the pirates used the hijacked vessel as a "mothership" for attacks on oil tankers.  The Gulf of Guinea is now the center of piracy in the world: in 2019, it accounted for over 90 percent of maritime kidnappings globally. Most of the pirates are Nigerian, from the Niger Delta, the region where most of Nigeria's oil comes from. The Delta has been rocked by the fall in international oil prices and the degradation of the environment by oil spills, which have damaged local agriculture and fishing while adversely impacting human health. The Nigerian government's official policy is against the payment of ransom, so the amounts are usually not made public. In this particular case, the ransom could have been paid outside of Nigeria, perhaps in Gabon. The episode illustrates how lucrative kidnapping can be, in the Gulf Guinea as well as elsewhere. The $300,000 sum is large, especially for communities that ring the Gulf of Guinea.

Nkasi Wodu is a lawyer, peacebuilding practitioner, and development expert based in Port Harcourt, Nigeria. In May 1966, General Johnson Aguiyi-Ironsi, Nigeria’s first military head of state—also known as Johnny Ironside for his exploits in a peacekeeping mission in the Congo—promulgated the infamous Decree No. 34 of 1966, the “unification decree.” The decree effectively did away with the federal system of government practiced by Nigeria since its independence from British colonial rule in 1960. In its place, the general instituted a unitary system of government as a way of discouraging “tribal loyalties and activities which promote tribal consciousness and sectional interests and which must give way to the urgent task of national reconstruction.” The decree suspended aspects of the Nigerian constitution and, with it, the military government arrogated to itself wide discretionary powers. Unknown to the general, the effects of this decree would reverberate well into Nigeria’s sixtieth year as an independent nation. Since 1966, Nigeria has had several constitutions, each giving broad—and exclusive—powers to the central or federal government, to the detriment of its constituent units. In many countries with federal systems of government, the central government retains some exclusive powers as is necessary to enable uniformity in governance. For example, in the United States, the federal government retains the powers of the treasury, the military, and immigration. In the Nigerian case, the exclusive powers retained by the central government go beyond ensuring uniformity. Successive federal governments have maintained the stranglehold on power, justified by the aim of providing a political solution to the disunity and deep divisions that have existed since the unification decree was passed. The result has been the creation of a gargantuan political entity with a concentration of powers at the center and underdeveloped states. The method by which Nigeria allocates revenue between the central government and states impedes the development of a truly federal polity. The 1963 constitution granted regional governments control over natural and human resources found within their territories as well as broad powers to use these resources to fast-track local development. Consequently, big strides were made in areas such as education and agriculture. The oil boom of the 1970s, however, led to an overdependence on oil revenues and the relegation of the agricultural, manufacturing, and service sectors. The growing preeminence of the Supreme Military Council led to the creation of a mono-economy, whereby states became—by no choice of their own—addicted to monthly grants from the central government, leaving them incapable of addressing their deficient infrastructure. As states' autonomy gradually eroded under decades of military rule, little local competency was left that could offset the poor administration and profligacy of successive military governments. This problem continues despite the return to civilian rule: the 1999 constitution perpetuated the lopsided system in which real power lies in Abuja. Another victim of Nigeria’s problematic federal system is the security sector, especially in the area of policing, where the federal government has exclusive powers. The constitution continued the practice of operating a highly centralized police structure—a relic of British colonialism. The inflexibility inherent in the policing system has led to an ineffective force, dogged by issues of poor funding, a history of human rights violations, and unqualified allegiance to the central government—all to the detriment of the people. Many experts have called for reforms to the Nigerian police, while others have insisted on dismantling the current centralized system, reestablishing it as a decentralized entity that conforms to international policing standards. These calls have been left unheeded by successive administrations. Consequently, Nigeria is left with unmotivated, undertrained police officers that resort to bribery and extortion to make up for salary shortfalls. Revealingly, the Nigeria Police Force currently sits at the bottom of the International Police Science Association’s World Internal Security and Police Index ranking. In the energy sector, Nigeria continues to suffer the effects of its flawed federalism. Although the constitution allows both the state and the federal governments to legislate on this sector, it restricts states from making laws that clash with federal legislation. The upshot is that the federal government maintains an effective monopoly with regard to the generation, transmission, and distribution of electricity, relegating the states to legislate on areas not covered by the national grid. The result is a dependence on an antiquated, expensive central grid system and insufficient electric generation capacity, sapping the economy of much-needed growth. Against this backdrop, various quarters have called for a restructuring of the country. While some of these calls are colored by politics, what is apparent is that as long as the federal government maintains its range of exclusive powers, the country’s structural problems will remain. At present, a gradual reversal is taking place, with increasing pushback for state-controlled police forces and pressure for greater devolution to the states, as illustrated by a constitutional amendment being considered in the National Assembly. To construct a more effective federal system, Nigeria should ditch its unitary preoccupation and equitably distribute power to the states, leaving with them the fiscal autonomy needed to catalyze economic growth—thereby improving prospects for peace and development.

Nkasi Wodu is a lawyer, peacebuilding practitioner, and development expert based in Port Harcourt, Nigeria. In January 2006, a fledgling group known as the Movement for the Emancipation of Niger Delta People (MEND) kidnapped a group of oil workers, setting in motion a series of high-profile abductions of oil workers and attacks on oil facilities. Nigeria’s oil revenues fell, fomenting instability in the Niger Delta region. Militant groups under the platform of MEND unleashed coordinated attacks on Nigeria’s oil and gas infrastructure from 2006 to 2009. The pace of attacks fell after President Umaru Yar’Adua established an Amnesty Program that ostensibly included disarmament of militants, job training programs for ex-militants, and a system of payoffs that especially benefitted their leaders. When they were active, the Niger Delta militants were often enmeshed deep in the creeks of the region, in makeshift camps cautiously hidden from view to protect against possible aerial bombardment and attacks by the Nigerian military. From those hideouts, militants orchestrated attacks on oil facilities and kidnapped workers. In response, the Nigerian military chased them all over the creeks of the Delta—sometimes inflicting casualties, at others outwitted by a ragtag group with little formal training in warfare. According to a UN Development Program report, the difficult topography in the region “encourages people to gather in small communities—of the estimated 13,329 settlements in the region, 94 percent have populations of less than five thousand,” though the regional population is estimated around thirty million in total. In the Delta’s small settlements, “infrastructure and social services are generally deplorable.” The report highlights the paradox of an oil-rich region mired in poverty: “ordinarily, the Niger Delta should be a gigantic economic reservoir of national and international importance,” due to the scale of its resource wealth. However, “in reality, the Niger Delta is a region suffering from administrative neglect, crumbling social infrastructure and services, high unemployment, social deprivation, abject poverty, filth and squalor, and endemic conflict.” This reality animates the various armed groups that have emerged in the region. MEND, the Niger Delta Avengers, and the Niger Delta Green Justice Mandate have all insisted that the federal government address issues of poverty, neglect, and environmental degradation. And because of the failure of successive governments to address these issues, armed militants remain active. These groups evade the military as they traverse the creeks and tributaries of the region to bomb oil facilities or abduct oil workers. In 2016 alone there were more than twenty attacks carried out on oil facilities in the region. Sometimes, these attacks are carried out with the knowledge and tacit support of local people. In October 2020, a group known as the Reformed Niger Delta Avengers issued a warning to the Nigerian government, threatening to resume attacks if their eleven demands are not met by the new year. The relationship between armed groups and the indigenous populations of the region is complex. Militants clearly employ techniques to attract local people and then lock them into a network of incentives. These range from persuasion to coercion, and are designed to control, corral, manipulate, and mobilize populations. Armed militants in the Niger Delta continually seek to legitimize their actions in the eyes of the local population. Residents of the region—particularly in the coastal communities where militant activities are rife—experience neglect, deprivation, and a lack of infrastructure. School buildings and health centers, already decrepit, are often times not operational because teachers and doctors do not want to travel to work. Abject poverty is widespread, with a teeming youth population that is either out of school, unemployed, or both. Delta residents feel a great sense of frustration at the almost total abandonment by successive federal and state governments, which receive huge sums from the oil drilled in the residents’ backyard. Armed groups tap into these frustrations frequently by projecting themselves as freedom fighters, supposedly risking life and limb to agitate the government for a better life in the Delta. People see the agitations of the armed groups as an expression of their internal frustrations and yearnings to hold federal and local governments to account for failing to fulfill their responsibilities. Of course, sometimes militants use fear to keep the people submissive. Yet, armed groups have also taken up the role of philanthropists, providing welfare to a people weighed down continuously by the burden of living in a paradox. Militant leaders have been known to utilize proceeds from oil bunkering activities to provide scholarships to students, build health centers and schools, and resolve disputes in their communities. By doing this, they seek legitimacy from the people, who are then willing to overlook—even excuse—their criminal enterprises. The federal government’s response to the issue of militancy has always been to deploy more soldiers to the region to restore calm. These deployments often result in heightened insecurity in the region. Human rights violations occur frequently; communities have been raided and in some cases bombed. And herein lies the problem: what is usually meant to be an operation to restore order takes the form of an occupation or invasion by a force that the people consider alien to them. Military activities erode further the trust deficit between the state and the people. To address sustainably the issue of militancy in the region, the government should do two things. It should first seek to delegitimize armed groups by building trust with the people. It can do so by asserting its authority—not through military might, but by providing basic services, such as education and proper health facilities. For many Niger Delta communities, the most visible signs of development are infrastructure built by international oil companies or former militant generals, while many of the waterways are dotted with military assets of the Joint Task Force. A running joke in the region goes that while development remains elusive, the ballot box has no problem getting to Delta communities on election days. The federal government should also exercise good faith by committing to its obligations under the Strategic Implementation Work Plan, established in 2017 in response to militant agitations in the region, as well as the Action Plan enacted by the Ministry of the Niger Delta. Prioritizing the passage of the Petroleum Industry Bill is another necessary step. When Niger Delta residents see more development and fewer bullets from the military, agitations of armed groups in the region will cease.

Relations between the two countries, long bound by common interests in oil and security, have strained over what some analysts see as a more assertive Saudi foreign policy.

This post is co-written by Daniel Scheitrum, an assistant professor at the University of Arizona’s Department of Agricultural and Resource Economics. In the U.S. Environmental Protection Agency document summarizing the newly proposed Affordable Clean Energy rule (ACE), the notice correctly points out in the background section of the executive summary that carbon dioxide emissions in the U.S. power sector have steadily declined in recent years “due to a variety of power industry trends, which are expected to continue.” The EPA document specifically mentions an expectation that the price of natural gas will remain low and solar capacity will continue to grow. It notes that some power plant generators have announced plans to change their generation mix “away from coal-fired generation towards natural gas fired generation, renewables and more deployment of energy efficiency measures” and cites the U.S. Energy Information Administration’s (EIA)’s 2018 Annual Energy Outlook, “the cumulative effect of increased coal plant retirements, lower natural gas prices and lower electricity demand in the AEO2018 reference case is a reduction in the projected CO2 emissions from electric generators even without [implementation of] the [CPP].” These same market trends have been noted by independent experts who also contend that the ACE is unlikely to change the trajectory for U.S. coal. S&P Global Market Intelligence reported last week that it saw no evidence that electric and municipal utilities were going to reevaluate plans to shut down coal generation as a result of the shift to the new ACE plan. S&P Global’s analysis forecasts that 23,700 Megawatts (MW) of coal-fired capacity is scheduled to be retired between 2018 and 2032, including thirty-six coal units expected to shut down prior to 2020. Some major utilities have already publicly confirmed retirement plans will continue unchanged. For example, AEP and Dominion Energy have announced that they will not adjust plans. Dominion still plans to retire its Yorktown coal units while Duke Energy will retire coal at Asheville, North Carolina and bring on natural gas-generation in the same location. Duke also has plans to retire plants in Gaston County, North Carolina and Citrus County, Florida in a business decision the company says was not related to the CPP. Notably, First Energy Corporation has said the new proposed ACE will not change the planned retirement or transfer of the 1,300 MW Pleasants coal plant in West Virginia. FirstEnergy Solutions announced it plans to shut down four coal fired power plants, including three in Ohio, by 2022. Colorado’s Public Utility commission also gave preliminary approval this week for Xcel Energy to close 660 MW of coal fired generation and replace it with renewable energy plus battery storage. The utility says the plan will save ratepayers $213 million. While there seems to be a lot of agreement on these basic trends, the numbers on anticipated emissions reductions from the U.S. electricity sector between now and 2035 vary considerably. We take a closer look at the differences and offer some background. The Clean Power Plan, proposed by the Obama administration in 2014, prescribed that each state would meet specific standards for carbon dioxide emissions based on their individual energy consumption. States were free to determine how to achieve the reductions through a state action plan to be approved by EPA. The plan was challenged in court by twenty-seven states. At issue, among other objections, was the plan’s broad scope covering actions that went beyond regulating steps to be taken at the individual plants themselves. The new proposed ACE rule limits regulation to plant-specific compliance to performance standards.  Estimates for the emission reductions that will come via the ACE diverge from other forecasts for the U.S. power sector and are lower than reductions projected for the Clean Power Plan. To delve into the differences, we start by pointing out that estimates from 2015 regarding the CPP’s expected effect on emissions are considered out of date. That’s because so much change in fuel sources for U.S. generation has already taken place in the power sector that emissions reductions have gone beyond estimates for the current time made four years earlier. There are even notable differences between the EIA’s AEO 2017 and AEO 2018 estimates which makes sense since market driven changes in the sector are happening so rapidly. One important input variable producing differences in analysis for 2025 to 2035 is assumptions about future U.S. domestic natural gas prices. The EIA reference case assumes natural gas prices of $3.40-$5.00 per million Btu (mmBtu) while its “high resource” case projects natural gas prices in the range of $2.90-$3.30/mmBtu. We believe the high resource case estimate for U.S. natural gas prices is most likely given that prices have averaged $3.15/mmBtu over the past five years. Futures prices out to the year 2025 range from $2.91/mmBtu at the end of 2018 to $2.70 in summer 2025 and while they are not predictors per se, they reflect the amalgamation of current bets by natural gas traders. Barclays raised its natural gas forecast for fourth quarter 2018 to $2.83 mmBtu, up from $2.58 mmBtu, noting that injections of natural gas to storage this year have been the lowest in almost a decade. Cheniere’s new liquefaction trains at Corpus Christi, Texas and Sabine Pass are also expected to come on line soon ahead of schedule, originally scheduled for early 2019. A new plant at Elba Island will also start operations this year. The three projects together will boost U.S. export capacity by about 1.5 billion cubic feet a day. Barclay’s also notes that U.S. natural gas production will reach record highs next year, growing by 4.5 bcf/d. EIA’s 2018 reference case for greenhouse gas emissions without the CPP in place expected emission reductions of 694 million metric tons (MMT) by 2025 compared to 2005, 662 MMT in 2030, and 683 MMT in 2035. By comparison, the high resource case without the CPP projects emissions reductions of 807 MMT in 2025 compared to 2005, 751 MMT in 2030, and 738 MMT in 2035. The EPA’s ACE proposal does not provide estimate of total levels of emissions, but rather changes in the baseline emissions. EPA’s models differ from those of EIA and focus on changes on a state by state, facility by facility level and caps only existing sources. That is in contrast to EIA’s model which looks across state lines at regional balances and projections for competition among new sources. EPA’s estimates in the rollout of the ACE projects that repealing the CPP would increase emissions by 45 MMT in 2025, 67 MMT in 2030, and 60 MMT in 2035. The proposed emissions reductions of the ACE program are provided in comparison to these values. For instance, the ACE scenario of Replacing the CPP with Heat Rate Improvements of 4.5 percent at a cost of $50/kW projects emissions to increase by 34 MMT by 2025, 55 MMT in 2030, and 50 MMT in 2035. The contribution of the ACE in 2025 is then reducing emissions by 11 MMT compared to replacing the CPP with no policy. Jason Bordoff of Columbia University’s Center for Global Energy Policy (CGEP) noted the gaps in these estimates in a recent op-ed, and compared them to Rhodium Group’s baseline forecast, which anticipates higher emissions reductions of about 35 percent by 2030 and assumes similar natural gas prices as the high resource case for EIA. In his op-ed, Bordoff notes that a recent joint Columbia-Rhodium study calculated that a carbon tax starting at $50 per ton and rising each year by 2 percent could double the 36 percent emissions reduction previously expected from the CPP by 2030 by accelerating the switch to renewables. The bottom line is that there is much uncertainty about the ultimate level of emissions changes that could result by 2025 depending on both market trends and policy frameworks. One interesting aspect of the proposed rule-making under the ACE is that it would give individual states up to two years to develop and submit their climate action plans for the power sector to EPA for approval. That would kick the can into the next U.S. presidential election cycle. Since polling shows that a majority of Americans are in favor of some kind of climate policy and climactic weather events are likely to stay in the news through 2020, it’s anyone’s guess how individual states will choose to proceed. This fall’s midterm elections could provide some hints.

Stefan Koester is an intern with the Energy Security and Climate Change program at the Council on Foreign Relations. He is a graduate student at the Fletcher School of Law and Diplomacy at Tufts University. Today the Trump administration published proposed rulemaking rescinding the authority of California to set its own tougher vehicle emissions standards along with the state’s Zero Emission Vehicle (ZEV) mandate. Under what the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) are calling the One National Standard, California and nine other states following its lead, would no longer have the authority to set GHG emissions standards or ZEV mandates that are different from a federal standard. California and other states have promised to sue the Federal government, likely leading to years of litigation and market uncertainty. While this battle plays out in the courts, there are lessons that can be learned from the clean electricity transition to see how states, cities, and corporations can spur EV adoption in the absence of federal leadership. There are unique differences between the electric power and transportation sector, but there are broad lessons from the electric power sector to apply to the burgeoning transportation transition. In the absence of the authority of states to set ZEV mandates, there are ways states, cities, and corporations can work collaboratively to drive the clean transportation transition. State-level taxes on gas guzzlers and rebates for EVs can send the right market signal to consumers and spur automakers. Strong and public EV procurement commitments on the part of logistics and transportation companies would show corporate leadership. And finally, U.S. automakers may realize competitive difficulties in managing multiple, parallel business platforms if automakers do not focus more attention on the global EV market. All this is to say that U.S. automakers could ignore federal rules, regardless of federal policy, and stay the course to comply with the California standard. Where Renewables and EVs are today Wind and solar are now the second and third fastest growing energy sources in the United States, respectively. Since 2010, nearly half of all new capacity additions have been from renewables. This year, under the less-than favorable conditions of the Trump administration, wind and solar are the second (1,956MW) and third (1,921MW) largest source of new generation after natural gas (6,646MW). In total, wind and solar made up 36 percent of all new generation this year. With the falling cost of wind and solar, along with battery storage technology, it is likely that renewable energy will hit grid parity with natural gas, on a levelized cost basis, in the next five to ten years. Renewables still only make up 7.3 percent of the electricity sector to date, but several states, like California, Iowa, and Massachusetts, are well on their way to reaching 50 percent in the coming decades. Electrification in the transport sector, even in California which has had incentives for several decades, is not matching the success of renewables. Today, there are roughly 269 million registered motor vehicles in the United States, and while EV (both plug-in and pure-battery) sales grew by 20 percent in 2017, they only make up 0.3 percent of total vehicle stock. Even the most optimistic projections out to 2040 show that EVs will only make up a third of global vehicle fleets. The EIA’s more modest growth trajectory shows EVs growing to 6 percent of total sales by 2040. The Trump administration’s proposed rule will likely slow this development even further, with estimates of an additional 2.2 billion tons of greenhouse gas (GHG) emissions through 2040. While Mandates worked for Renewables, they haven’t worked for EVs It is unclear what the legal outcome of the EPA/NHTSA rule will be and it is unclear whether the courts will issue a stay in California’s favor, allowing the standards to remain in place during litigation. However, it’s clear that while state mandates worked in the clean energy transition, their success in the transportation sector is limited. Renewable portfolio standards (RPS) for power generation have been around for more than two decades and now apply to 29 states. State RPSs created long term contracting and investment certainty for project developers and utilities, and ensured market demand. Between 2000 and 2016, RPS programs were responsible for roughly 56 percent of total U.S. renewable energy deployments, with estimates that RPSs will drive an additional 4GW of annual generation between now and 2030. States are now building more renewable resources than required under RPS statues due to falling costs and acceptance of wind and solar technologies by utilities and regulators as valuable grid contributors. The spectacular success of the RPS, however, is not easily transferable to EV adoption. In theory, ZEV mandates, like the RPS, could drive investment and certainty into burgeoning markets by ensuring that if automakers design, build, and market EVs, then there will be a market for them. Ten states have a ZEV mandate, but even the most ambitious, California, will require roughly 6 percent of total vehicle stock to be battery-electric vehicles by 2025 and 5 million by 2030, about a quarter of the state’s 20 million vehicles. California only has 366,000 EVs on the road today. The failure of ZEVs to spur the clean energy transition in the same way that RPSs have is for a number of reasons. Unlike the electric power sector, which has a couple dozen state-wide utility and regulatory actors, the transportation sector has millions of consumers, thousands of dealers, dozens of large global manufactures, and little existing infrastructure to adequately support deep EV penetration. ZEV mandates have failed to lead to widespread consumer adoption of EVs due to inadequate supporting policies for charging, dealer resistance to marketing EVs, higher upfront costs, limited available model options, and continuing consumer preferences in favor of large internal combustion engine (ICE) vehicles. In addition, turnover of the vehicle stock, which is roughly once every twelve years, requires that the consumer have market access to a perfectly substitutable EV when purchasing a new car, something that is not available today. It is unlikely that stronger mandates, regardless of Federal action, would help drive further EV adoption in the absence of supporting state and local policies to help overcome additional barriers. A state ‘feebate’ program where consumers pay a fee for gas guzzling cars and receive a rebate for EVs is likely both immune to federal interference and would spur greater consumer demand for EVs than state-wide ZEV mandates. Feebates are analogous to federal and state tax subsidies for renewable energy and, where it exists, carbon pricing that serves as a fee on fossil-fuel generation. Tax subsidies and carbon pricing helped spur investment in renewables above and beyond state RPSs. Feebates could jump start the clean transportation transition. Corporate and Public Procurement Strategies Can Drive Demand While ZEV mandates have been disappointing, corporate and public procurement policies could increase EV adoption by driving market demand, lowering technology cost, and helping overcome consumer preference barriers. When large corporates publically committed to investing in renewables, states and cities competed to adopt clean energy policies to attract investment, leading corporates to invest billions in renewables across the country. Google and Apple made headlines last year when they announced, separately, that they were 100 percent powered by renewable energy. Google signed its first renewable contract in 2010 and rapidly increased its share of renewables with investments totaling more than $3 billion, for more than 2.4 GW of renewables. Apple followed up soon thereafter announcing that they were 100 percent renewable across their global operations with over 1.4GW of renewable capacity. In total, more than 140 international corporations have pledged 100 percent renewables, driving 19GW of renewable energy demand since 2008. While these companies may be investing in renewable energy for the green bona fides, they are ultimately doing it because renewables are cheap. Strong procurement commitments on the part of large corporate entities could do the same thing for EVs. UPS, FedEx and DHL are now conducting large-scale testing of EVs in their trucking fleets and their doing it because their delivery costs will fall. Total ownership cost of EVs is lower due to fuel, maintenance, and operations savings. EV trucks are also smarter than ICE vehicles, through IoT sensors and routing technologies, allowing for increased efficiency and reduced delivery times. Finally, consumers may come to demand it as the environmental costs of same-day shipping are more widely appreciated.   Corporates can drive EV adoption in the passenger fleet as well. Uber recently announced a pilot program in seven cities that pays drivers an extra dollar for each ride they do in an EV. Lyft has an ambitious, multi-year plan to become a carbon-neutral transportation company, predicting that by 2025 they will provide one billion rides per year in electric vehicles. In the same way that corporations leaned on states and cities for favorable renewable energy policies, corporations interested in electrifying their fleets could put pressure on states and cities to invest in electric vehicle infrastructure such as public charging, preferential lane access, and license fee waivers. Cities could also require that ride-sharing services switch to EVs over a certain number of years, effectively shifting millions of drivers into vehicles that are cleaner and cheaper to operate. Cities also did their part to drive demand with commitments to 100 percent renewable energy. More than seventy U.S. cities made 100 percent renewable energy pledges, including Atlanta, Madison, Portland, and San Diego. Similar commitments can drive increased EV adoption. Cities could commit to converting their municipal vehicle fleets to EVs. The public sector can drive down battery costs through electric public bus procurement commitments, in addition to fleet-wide conversions of public vehicles. Cities all around the country are already transitioning to electric buses, but they are not doing it fast enough. New York City aims to switch all 5,700 MTA buses to electric by 2040. San Francisco, Washington, D.C., Salt Lake City, and other have made similar pledges. The average life span of a public bus is twelve years. Speeding these commitments up to within the next decade would fuel growth in the EV bus sector and drive down costs throughout the technology stack. Electric buses are popular with city transit officials because they are cheaper, cleaner, quieter, and popular with riders. In addition, city school boards could push to electrify the nation’s 480,000 diesel school buses. This alone would save roughly $2.9 billion, annually, in fuel and maintenance costs, money cities can reinvest into schools. Corporate and public commitments like these can move the needle on EV market demand, battery technology costs, and public infrastructure requirements. In addition, states and cities could begin to compete with one another to have the most favorable EV policies, attracting investment from logistics and transportation companies, automakers, and utilities. Large Corporates Don’t Like Managing Multiple Platforms When Xcel Energy CEO Ben Fowke announced last year that the western utility with 3.3 million customers would be backing a long term business strategy centered around “steel for fuel”, investors and industry analysis were supportive. The strategy refocuses the utility through massive long term investments in cheap wind and solar, while divesting from expensive coal. A number of other utilities have announced similar plans to back away from costly fossil generation and focus heavily on renewables. Ultimately, some utilities see running two platforms, a fossil-fuel one and a renewables one, as a long term losing strategy. The major U.S. automakers are currently running multi-platform businesses with ICE vehicles that serve the dominant segment of the market and smaller EV design, production, and marketing divisions. As consumers and corporates begin to demand increased EV options automakers could find that running multiple, parallel production platforms is costly and inefficient. China, as one senior official noted, is working to end the production and sale of ICE vehicles, increasing the pressure on major U.S. car makers like GM, Ford, and Chrysler to build and sell more EVs. In addition, major foreign automakers like Volkswagen, Diamler, Volvo, and BMW have made ambitious commitments to transition away from ICE vehicles and toward all electric platforms. The Big Three automakers have been slow to adapt, but they may find that maintaining two parallel assembly lines, one that builds traditional ICE vehicles and one the builds EVs, is increasingly more expensive and less profitable than optimizing production on just one line. With the global focus on increased EV adoption, together with state, city, and corporate policies to drive further growth in the United States, automakers might start feeling the pressure to compete on their EV offerings. Focusing only on ICEs, as the Trump administration is doing, is not a good global business solution. While ICEs are cheaper today throughout the world, EV costs are falling rapidly. U.S. car manufacturers may lose global market share if they are not able to keep up with global EV demand. In addition, ongoing federal litigation will increase regulatory uncertainty for automakers.   Just as some utilities have made the choice to invest in renewables for future generation, it is important for U.S. automakers to keep forward looking global strategies. Federal policy should not discourage American automakers from a transition away from fossil-driven technologies if it becomes too costly to maintain two engine platforms or they risk being placed at a global competitive disadvantage to foreign automakers. The Clean Transportation Transition Going Forward The Trump administration has shown its hostility to state-level emissions and electric vehicle mandates. While the legal challenges work their way through the court, states, cities, and corporations, including U.S. automakers, can drive the clean transportation transition forward through ‘feebates’, procurement commitments, supportive state EV policies, and a transition away from multi-platform business strategies. Using lessons learned from the successes of the clean energy transition, states, cities, and corporations can advance EV adoption in the absence of Federal leadership. In addition, the clean energy transition shows that an economy-wide shift in a major sector of the economy is possible and can happen within a short amount of time. While a potential compromise between California and the Federal government is conceivable, in its absence there is much that states, cities, and corporations can do.

The premium appears to be creeping back into international oil prices as markets wait to see who will be policing the sea lanes in the aftermath of a Saudi announcement that it would temporarily halt oil shipments via the Bab el-Mandeb Strait. The Saudi announcement came after two of its oil-laden tankers were attacked by Yemeni Houthi militias. Shipments in the Bab el-Mandeb Strait, which connects the Red Sea and Suez Canal with the Persian Gulf and Indian Ocean via the Gulf of Aden, is a major sea route for oil shipments of close to five million barrels a day (b/d) of crude oil and petroleum products in both directions, including 2.8 million b/d flowing from the Mideast to Europe. Refined products from Saudi Arabia’s Yanbu refinery on the Red Sea are frequently exported south through the Bab el-Mandeb Strait to Asia. The Strait can be bypassed for northern traffic by sending ships on a longer, more expensive route around the southern tip of Africa.  Yemeni rebel attacks on shipping in the Bab el-Mandeb Strait are not a new occurrence but take on new importance in light of the U.S. withdrawal from the Iran nuclear deal (JCPOA) and subsequent planned reimposition of sanctions against Iranian oil sales. Iran has threatened that the United States would be mistaken if it thinks Iran would be the “only” country unable to export its oil. Iran explicitly mentioned its ability to close the Strait of Hormuz through which over eighteen to nineteen million b/d of Mideast crude oil transits. The United States has the capability to reopen any blockage of the Strait by military means and provided minesweepers and military shipping escorts to reflagged Kuwaiti oil tankers in the 1980s during the eight year Iraq-Iran war.  Saudi news outlets have run headlines in recent days that the United States was “weighing” its military options to keep the sea lanes open. The headlines, also published in Israeli newspapers, are referring to a statement made by U.S. Defense Secretary James Mattis who told Pentagon reporters on July 27 in discussing Iran’s threats to a different waterway chokepoint, the Strait of Hormuz, “They’ve (Iran) done that in years past; they saw the international community put dozens of nations’ naval forces in for exercises to clear the strait…Clearly this (closure) would be an attack on international shipping and could have an international response to reopen the shipping lanes…because the world’s economy depends on those energy supplies flowing out of there.” Mattis called upon Iran to abide by international rules.  Analysts say the U.S. withdrawal from the JCPOA has strengthened unity and coherence of the various factions within the Iranian government, moving Iranian President Hassan Rouhani to the right. Thinking about succession down the road for aging Supreme leader Ayatollah Ali Khamenei is influencing how the current line-up of political and religious leaders inside Iran are responding to the country’s current problems, Iran watchers say.  Still, in private briefings, Iranian officials are throwing around the term “strategic patience” as a guide to current thinking and noting that Iran has weathered sanctions for decades and will take no drastic measures against the United States or its regional allies. The argument goes that Tehran can afford to wait out the Trump administration, which will face a new election in 2020, and that Iran’s priority in the interim should be to avoid direct military clashes with the United States—which it believes U.S. allies Saudi Arabia and Israel would like to provoke. That raises the question regarding how much control Tehran has over its many armed proxies in Iraq, Yemen, Syria, and Lebanon. The relative independence of such proxies increases the risk of unintended or inadvertent clashes across a range of flash points, complicating U.S. responses.  In the intervening years since the Iraq-Iran war, several Arab oil exporters have built oil pipeline bypass routes so that a portion of their crude oil exports could avoid the Strait of Hormuz. Saudi Arabia’s Petroline, which can carry five million b/d of Saudi crude oil from eastern fields to an export facility on the Red Sea, is being expanded to carry seven million b/d by year end. Use of drag reduction agents can augment flows by as much as 65 percent. Abu Dhabi also has a 1.5 million b/d crude oil pipeline from Habshan to Fujairah that bypasses the Strait. Oman is building an oil storage hub at Duqm, and several Gulf Arab producers keep floating oil storage in tankers off the coast of Fujairah. Industry estimates are that Saudi Arabia also has over seventy million barrels in operational and strategic storage in Asia and Europe, among other locations.  Saudi leaders have been hoping that a military victory at Yemen’s port of Hodeidah might pave the way for intervention by the United Nations, progress on diplomatic negotiations, and by extension, a reduction in the risk to shipping in the Red Sea. So far, this goal has not been reached; hence, headlines in official news outlets about the U.S. role in the sea lanes.  President Donald Trump has actively tweeted about oil prices in recent weeks including a tweet that specifically mentioned how the United States protects regional countries. More recently, Presidential tweets have included warnings to Iran not to “threaten the United States.” The United States plays a critical role defending the global sea lanes and ensuring the free flow of oil around the world. Yemeni attacks on Saudi shipping make it harder for oil prices to recede, and saber rattling between Iran and the United States is on the rise as the November oil sanctions deadline approaches. This geopolitical backdrop is currently keeping oil markets on edge, despite increases in supply.  As U.S. midterm elections approach, high oil prices might not be the only factor that enters voters’ minds as they prepare to vote. The American public is weary of costly military engagement across the Middle East and could wonder why the United States is so unable to extricate itself from its role defending Middle East oil shipments, especially in light of rising U.S. domestic oil and gas production. Less than 10 percent of U.S. oil imports came from Saudi Arabia in 2017, with an additional 600,000 b/d originating from Iraq. But, Saudi Arabia remains a major oil supplier globally and most of the world’s spare oil production/export capacity sits in Saudi Arabia, Kuwait, and the United Arab Emirates. That means any disruption of oil supplies in the Persian Gulf would be a major threat to the global economy and would hurt U.S. trading partners, thereby damaging the U.S. economy as well even if the United States could more easily replace its limited Saudi and Iraqi oil imports. Hence, U.S. oil and gas production and exports have not reduced the U.S. need to police the free flow of oil from the Middle East. Oil commodity prices are also set globally which means like a swimming pool, where taking out water in one end of the pool affects the water level across the entire structure, an oil price rise due to the loss of supply in one part of the world is reflected in U.S. price levels as well all other locations across the globe. Rising oil prices still put U.S. consumers and important industries like the automotive sector under pressure, even if they are less negative for the overall U.S. economy. Ironically, the more successful the United States is in convincing the major economies to shun Iranian crude oil purchases, the more it could need to talk to the very same countries about sharing the financial or military burden of defending the sea lanes for oil flows from the Middle East. Without taking such action, it will be hard to convince Iran or its proxies that it is counterproductive to escalate threats to international shipping. Although the United States has appeared to shun international cooperation of late, continuing to maintain a very broad the coalition of European and Asian countries in sea lane navigation matters could discourage risky brinksmanship activities by all parties that could benefit from a direct confrontation between the United States and Iran.      

U.S. presidential jawboning about oil prices has continued to grab headlines this week, with President Trump telling Fox News on Sunday that the Organization of Petroleum Exporting Countries (OPEC) is manipulating the oil market and “better stop it.” The statement followed a previous tweet explicitly confirming a phone call with King Salman of Saudi Arabia regarding the kingdom’s agreement to put even more oil on markets than announced last week to counter turmoil inside Iran and Venezuela. The U.S. president’s unconventional approach contributed to an almost $2 drop in the price of international benchmark Brent crude Monday, as market psychology appeared to shift. That will likely be viewed favorably from the White House. But the transactional discussion offered on U.S. television that oil producing allies should offer accommodative oil export policies because “we are protecting them” laid bare a quid pro quo that could be problematical down the road given recent escalation of regional proxy wars. The United States may be encouraged by ongoing protests in Iran but turmoil can be unpredictable, and U.S. national interests can vary in certain respects from those of its allies. Close study of recent pernicious effects of cyclical swings in oil prices lends itself to sympathy for President Trump’s frustration. Given the circumstances of the financial turmoil and oil price collapse that followed the oil price spikes in 2008 and 2014, it should be pretty unnecessary to have to remind kings, presidents and emirs that an unstable oil market is bad for everyone, including their own people. For all the talk about resource wars, no shots were fired over oil when prices were rising in 1973, nor when prices hit $147 in 2008. That’s probably because for all of the handwringing about the oil “weapon,” commodity prices eventually correct themselves naturally like gravity, even in the face of politically inspired cutoffs. For OPEC, history seems not to be a teacher. Fuel switching, new drilling techniques, and structural destruction of long run demand reassert themselves when oil prices go up. That was certainly the explanation of the price collapse in 2014 to 2016. Moreover, in the future, countries like the United States and China are increasingly more likely to invest in alternatives rather than go to battle over resources either diplomatically or literally, especially in today’s digital revolution, where the potential for success is so high. The fact that few countries are willing to spend a trade chit on Iranian oil is a sign that times have changed. Oil producing countries are under budgetary pressure but, at least in the case of the Gulf countries and Russia, not enough to reverse course on high military spending and foreign adventurism. Venezuela should be the poster child for what could go wrong when governments raid the coffers of their national oil companies. The sad truth is that such suffering doesn’t actually seem to lead to regime change, just more repression. U.S. neoconservatives don’t seem to be learning that lesson either.   That said, I believe oil prices have entered a new phase where the traditional features like business cycles and geopolitics that normally dictate the ups and downs of oil prices are now intersecting more integrally with structural technological change. Digital disruption could bring a long run downward trend in energy costs over the coming decades, but that doesn’t necessarily mean “lower for longer” oil prices will be true for any particular month or year. If anything, digital innovation could be making the swings of the oil boom and bust cycle worse by shortening the time scale between up and down oil price phases. Private oil companies can bring new oil fields online with a rapid pace. Demand saving technologies are also readily available. To the extent that digital innovation does both simultaneously and seals a negative fate for individual national oil companies that cannot compete effectively in this new global context, it could bring higher oil prices at sharp intervals as oil supplies get disrupted from places where new investment is lagging, like Angola and Venezuela. In recent years, many important national oil companies (NOCs) have found themselves a victim of deteriorating budgets or violence—industries in Libya, Yemen, Syria, and Venezuela have been decimated. NOCs in Mexico, Brazil, and China have succumbed to localized corruption problems. The list is likely to expand over time. During periods when a major oil supplier goes down, OPEC (or some other group of oil exporters) are bound to find themselves with market power. That is why a volatility thesis based on the idea that producers can no longer interfere in markets is also likely incorrect for the time being, and the U.S. administration is smart to think about how to handle manipulation. Volatility can still come from exporter consortium attempts to goose prices. It may just be lumpy as technology continually improves to make itself felt and more frequent as digitization of everything from oil well development to energy efficiency gains pace. But if and when another major producer goes down (this time likely Iran), those left standing may attempt to garner some short-lived revenue as OPEC just did on the backs of Venezuela’s collapse. In the current upward business cycle, which has been stronger than expected, OPEC has certainly been able to jack up prices temporarily, unfortunately in all likelihood ensuring current global economic prosperity won’t last for long. For Russia, a culture that experiences long suffering of everyone together, instituting a downward global economic cycle could feel cathartic. For Iran’s hardliners, the temptation to push prices too high through acts of violence is likely a reflex to proving to others (read, American neocons) that they are still a force to be reckoned with. In the grand scheme of things, blowing things up to raise the price of oil will hasten the return of low oil prices which hurts the Iranian economy. Iran’s government has been preaching solidarity towards a resistance economy, albeit that message is looking increasingly uphill. Still, exigencies being what they are, the United States needs to be prepared to consider policies beyond calling upon Saudi Arabia, whose oil industry has struggled in recent years to add extra capacity. It is yet another reason why the United States should stay the course on advanced automobiles and other energy efficiency policies as well as modernizing the U.S. Strategic Petroleum Reserve. Rising U.S. oil production is not the same quality of oil as that of the Middle East, Venezuela, and Mexico so net flows in and out of the United States are necessary based on the current equipment in the U.S. refining industry which was designed to run imported oil. Sadly, recent consolidation of the SPR has left the United States in a worse position to help U.S. Gulf coast refiners. That problem needs to be revisited next time oil prices cycle down.   By the way, I am not conceding that the structural lowering of energy costs through digitization won’t be material. But it could entail a multi-year process. Every time oil prices go up, as they inevitably will repeatedly in a cyclical fashion, the deployment of new advanced technologies will accelerate accordingly, not only because we are in a period of revolutionary technological change, but also because other imperatives, like climate change and energy security, will give forward looking governments even more compelling reasons than the oil cycle to diversify away from oil. The United States needs to take that on board in considering its long run economic competitiveness. The U.S. Department of Energy’s new program for regional energy innovation, while underfunded, is a good start. Energy producing countries are starting to consider this digital structural change in their official thinking because the higher oil prices go, the more likely China and India are going to hasten policies to eliminate future oil demand, raising the chances of lower oil demand by the time 2025 or 2030 arrives. Governments are putting the infrastructures in place to ban the sales of internal combustion engines. European populations and their capitals care about climate change but renewable energy has also lessened the exposure to Russian energy. China is considering a ban on gasoline cars as part of its industrial policy. OPEC officials can say officially that they don’t believe in the peak oil demand narrative but a rise in oil prices above $100 now makes it all the more plausible than a drop to $20. At $100 a barrel, a ride sharing app that calls forth an electric ride will increasingly make sense in a world where new technologies are driving down the costs of solar, batteries, and even natural gas and clean coal. I am guessing that Saudi leaders understand this long run oil cycle threat. That is why they keep talking about decadal agreements with Moscow to stabilize oil prices. That’s good news for Vladimir Putin. But not because he believes he can ameliorate the oil cycle. He is just guessing that being the senior partner in an OPEC-like grouping will restore Russia to the stature it deserves. He is likely correct about that. It’s getting him yet another reset summit with the United States as energy has done several times before. The bad news for U.S. jawboning on the price of oil is this: There are two ways to get out of this painful pattern of oil price shock repetition and neither is likely to happen any time soon. Oil producers could start by spending more of their oil cycle windfalls on economic reforms, education, food and water security, and not buy as many armaments. For its part, the West, China, India, and ASEAN could make sure digital innovations like advanced and autonomous vehicles, drones and online shopping lower the oil intensity of their economies instead of the opposite effect so that economic growth does not promote as sharp an upward oil price cycle as in the past. I am not optimistic about either of those two things happening right away. For the time being, it will be hard for any of the parties concerned, to eliminate the oil cycle, including the U.S. president.