OUTLOOK 2006: United States
Washington In 2006

Washington energy politics: Another merry-go-round year

John McCaughey, Contributing Editor

At Murphy’s Irish Pub in Old Town Alexandria, Virginia, where a small band of earnest strivers foregathers every Sunday morning for the Champagne Brunch (what goes into this champagne is a secret between its maker and his Maker), energy guru Bob Hirsch invariably opens the proceedings with the question: “Well, what’s the good news in energy this week?”

Mostly, the question evokes a grunt, a scowl, a shrug or a Harrumph from his listeners. But, upon reflection, 2005 did produce some good news in energy – albeit of an obscure or elliptical nature.

For example, the new President’s Energy Policy Act of 2005, while groaning unconscionably with pork and devoid of anything that might enhance energy security, mercifully did not include a 1980s-style Windfall Profits Tax on the oil industry, as pessimists had feared, or a new Synfuels Corporation (remember that?) or Jimmy Carter’s disastrous energy policies or a Nixonian Project Independence or any of the other panicked follies to which politicians are notoriously prone when they come to debate energy issues.

The Windfall Profits Tax never completely goes away, of course, and in November, hardline oil industry bashers (both Republican and Democrat) in the Senate toyed with it, amidst dark talk about gasoline price gouging. But the gouging could not be proved and the votes for the windfall tax weren’t there, so nothing happened.

That is not to say that hope does not spring eternal in the political breast. Under the title of the Set America Free Coalition, a diverse bunch of Senators and Congressmen proposed legislation to reduce US dependence on foreign oil: a chimerical goal near and dear to the heart of born-again optimists like Senators Joseph Lieberman (D-Connecticut), Sam Brownback (R-Kansas), Ken Salazar (D-Colorado) and half a dozen more at least.

The group’s proposals contained nothing new: tax incentives for automakers to build more efficient cars, more tax incentives to persuade consumers to buy the cars and increased use of renewable fuels. One supposes that debating these proposals is a good thing – if for no other reason than that it keeps the politicians out of the public houses. In the end, though, politicians have to get it into their heads that the best way to conserve oil was demonstrated after Hurricane Katrina. Gasoline at $3 a gallon led to an immediate slump in SUV sales.

Samuel Bodman, a businessman with a scientific background, was appointed Secretary of Energy, but, by year-end, he seemed to be having no more success in reforming and revitalizing that dinosaur department than had any of his predecessors. The newsiest headline of 2006 would be: “White House Backs DOE Dismantlement.” But it isn’t going to happen, alas.

And while the hurricanes gave the Gulf Coast a terrific wallop, the damage to rigs, refineries and the industry was not quite as bad as had been feared, and recovery has been robust. Even the much-advertised cold winter has not been as fierce as expected. As a result, by Christmas, natural gas futures were dropping noticeably. People may even be just able to afford the natural gas heating bill at home without a third or fourth mortgage. But regions like New England, which depends on natural gas for 40% of its electricity generation, are by no means in the clear and may be looking at rolling blackouts in any cold snap.

Meanwhile, peak oil theorists continue to say that a global oil production peak may be a lot closer than is generally supposed. The year 2010 is often mentioned nowadays as the peak year. The idea continued to attract interest, including cover stories in National Geographic and Time magazines and the formation of a bipartisan Peak Oil Caucus in the House of Representatives. Peak oil theorists believe that over the last quarter century the world has grown to need more oil than the global industry can deliver. They also believe that Saudi Arabia is lying through its teeth about its real reserves.

Trying to sort this out, Energy Secretary Bodman in late 2005 asked the 175-member National Petroleum Council to study the peaking issue. But the NPC has a very patchy forecasting history. It also has a strong contingent of Big Oil representatives, and the oil majors tend, for the most part, to disparage peaking theory.

Saddest energy event of the year was the pipsqueak failure to pass legislation allowing oil drilling in part of the Arctic National Wildlife Refuge (ANWR). This has always been a no-brainer issue. The site is a patch of barren, frozen tundra. The area affected would be about the size of Washington’s Dulles Airport; environmental damage would be minimal or non-existent, and the rewards in oil could be spectacular. ANWR might very well become the country’s largest onshore oil production site.

But environmentalists passionately oppose drilling there and – with the help of politicians from the Northeastern states, who are cravenly anxious not to antagonize the Green Vote – they managed at the last minute to defeat it. Matters in the Senate were not helped by pro-driller Senator Ted Stevens (R-Alaska), a most cantankerous 82-year-old man who has made many enemies in the 25 years that he has been fighting for drilling in ANWR. With friends like Stevens, who needs enemies? – asked a senior pro-drilling lobbyist.

Meanwhile, after Hurricane Katrina at the top of the list, Climate Change came in second and Global Warming fourth in a list of political buzzwords used by Americans – as tracked by the organization Global Language Monitor. The group did not explain what the difference is between Climate Change and Global Warming. But, as the year wore on, the science behind these phenomena looked increasingly dubious. The Bush Administration remains adamantly opposed to signing the Kyoto Protocol, which is designed to ameliorate Global Warming (if it exists). The White House takes the view that Kyoto would do significant damage to the US economy and that its targets are hopelessly unrealistic. Indeed, many of the European countries that did sign on to Kyoto now admit that they can’t make the goals set out in the treaty.

So what will the year 2006 bring in energy news? Top of the legal entertainment calendar, obviously, will be the much-delayed Ken Lay/ Jeff Skilling trials in Houston over the Enron debacle. Lay and Skilling will be tried on conspiracy, fraud and other charges. The allegations are that the two men lied to the investing public about Enron’s financial condition and its business prospects. They have pleaded not guilty. Lay is expected to employ the defense strategy, “Yes, I was asleep at the switch. Lamentable, of course. I foolishly relied upon my subordinates, but that’s not illegal.”

Skilling who, as president, is alleged by the prosecution to have spearheaded a years-long conspiracy to cook Enron’s books, is in a much tougher position and may spend a number of years in a place where it is most unlikely that the butler will bring him a cup of Earl Grey tea in the morning. The Enron business was superbly anatomized in one of last year’s best business books: Conspiracy of Fools by Kurt Eichenwald (Broadway Books, NYC).

Then there is the Washingtonian case of former prominent lobbyist Jack Abramoff. He has, as they say, copped a plea, and his cooperation with prosecutors could lead them to a saga of corruption in Congress – possibly involving big names on both sides of the aisle. Former House Majority Leader Rep. Tom DeLay (R-Texas) for example, had numerous ties to Abramoff. A lot of earmarks in the energy and transportation acts may well be tracked to their sources and accurately priced: something that doesn’t happen nearly often enough in Washington. Ethics enforcement in Congress has long been the object of benign neglect. No investigations at all took place in 2005. For politicians, the timing could hardly be worse. If Abramoff tells all that he knows, indictments and trials might begin in the summer – just ahead of the midterm elections.

Corruption in Washington is a strange thing. Between salary, lavish expenses and generous political contributions, you would think that politicians have a sufficiency of funds and don’t need to be corrupt. But not so. As that old liberal warrior, the late Eugene McCarthy, put it in a different way once: “Being in politics,” he said, “is like being a football coach; you have to be smart enough to understand the game and dumb enough to think it’s important.”

As for the price of oil in 2006, who knows where Middle Eastern political volatility and the inexorable laws of supply and demand will take it? In December, the Energy Department predicted that oil prices will remain well over $50 a barrel for years to come. But the Department has been wrong before.

Two likely beneficiaries can be identified, however: US domestic oil and gas producers, and Alberta, which is already being identified as “the Kuwait of North America,” because of its huge reserves of oil-bearing sand, which a high oil price may at last make economic to produce. Using ConocoPhillips’ December $36-billion acquisition of Burlington Resources as a harbinger, US independents this year could be in for a spate of acquisitions by cash-rich big companies willing to pay top dollar.

In fact, there is a little-reported third beneficiary of the current oil price: the state coffers. Oil, gas and coal taxes at present levels are producing huge surpluses for state budgets: money that can be spent on roads, schools, hospitals, airports, bridges-to-nowhere and, above all, on buying votes. It’s a great deal for incumbent governors and legislatures.

Another problem that US policymakers and oil companies will have to grapple with as the New Year rolls on is refining capacity. No refinery has been built in America for 30 years and the country has no strategic stocks of gasoline, while Europe has little to export. The situation is made more difficult by a patchwork of quixotic requirements in gasoline mixtures dictated by environmentalists in various states. This makes free-flowing interstate commerce in refined products impossible in large chunks of the country.

Oddly enough, an unforeseen consequence of Katrina may be to spur the building of more refineries and to prompt a cutback in environmental regulations. But that may not happen because – generally speaking – Washington reacts only when the ordure has hit the fan, and the crisis has become a real and present danger. By which time, a political fix tends to be too little, too late.

Late 2005 was also not a good moment for liquefied natural gas (LNG), which a number of enthusiasts claim could go a long way to solving the US’s ever-increasing demand for natural gas. Economically, the Americans are finding themselves outbid for LNG cargoes by buyers in Europe and Asia who are willing to pay a bit more. The safety issue of tankers and the possibility of terrorist attacks on the ships has not gone away: an explosion on a tanker, it is said, would kill everyone within a mile and injure many more outside that radius. Leaks and safety scares at year’s end dogged LNG tankers owned by British companies and by Gaz de France. South Korean-built LNG tankers are under special scrutiny for safety. All of this fuels local opposition to LNG terminals in the US – opposition made up not just of environmentalists but of ordinary citizens who live near the terminals. Demand for coal, therefore, seems never to have looked better.

Not so for ethanol. In early December came the news that Colorado’s Air Quality Control Commission is considering scrapping Denver’s ethanol program. This 17-year-old program mandates that gasoline sold in Denver during the winter be mixed with ethanol. The goal is to clean up the city’s air.

It worked, but now the science is coming in: the ethanol had very little to do with clearing up the smog. Most of the credit should go to newer cars with their catalytic converters. In any case, the evidence suggests that the environmental benefits from using ethanol are offset by emissions from the ethanol manufacturing process.

But there is good news too. Coors Brewing Company in Golden, Colorado, has spent $2.3 million to double its program to turn wasted beer into ethanol. Hey, we knew there had to be some legal way to chug a beer while behind the wheel.  

THE AUTHOR
	John McCaughey edits and publishes Energy Perspective, a Washington-based, fortnightly publication that features in-depth coverage of major energy topics. Mr. McCaughey has been a journalist during all his working life. He has written and edited for Irish newspapers, an international news agency, the London-based Financial Times and the US-based Energy Daily newsletter, and contributed to many other newspapers.