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1 Global Warming and the Great Climate Debate The possible economic impact on the US and Louisiana Presented by: Eric N. Smith Tulane Energy Institute.

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Presentation on theme: "1 Global Warming and the Great Climate Debate The possible economic impact on the US and Louisiana Presented by: Eric N. Smith Tulane Energy Institute."— Presentation transcript:

1 1 Global Warming and the Great Climate Debate The possible economic impact on the US and Louisiana Presented by: Eric N. Smith Tulane Energy Institute Presentation to the Councilors in Real Estate Convention October 14, 2009

2 Oil consumption and income (2005 Data) USA 2


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6 6 EIA Annual Energy Outlook 2009 Reference Case Presentation -- December 17, 2008 Nuclear Natural Gas Liquid Fuels Coal Renewables (excl liquid biofuels) Non-fossil energy use grows rapidly, but fossil fuels still provide 79 percent of total energy use in 2030 HistoryProjection Liquid Biofuels quadrillion Btu

7 7 Number 11

8 Refinery Locations in Texas and Louisiana account for ~50% of total US capacity 8



11 Figure 3. 2007 Average Regular Grade Gasoline Prices at Retail Outlets by Region (dollars per gallon, including taxes). Gasoline Prices are inversely proportional to the distance from Refineries California also has the added costs of more stringent air quality standards 11

12 12 EIA Annual Energy Outlook 2009 Reference Case Presentation -- December 17, 2008 Industrial Transportation Residential and Commercial Electric Power Petroleum-based liquids consumption is projected to be flat as biofuels use grows Biofuels million barrels per day HistoryProjections

13 13 Number 7

14 Liquid Fuel Alternatives: costs and emissions vary widely Percent of Greenhouse Gas Emissions Relative to Conventional Oil Production Cost (US Dollars Per Barrel of Oil Equivalent Cellulosic ethanol Biodiesel (soybean) Corn ethanol Oil shale Tar sands Coal-to-liquids Range of crude oil prices 14

15 Source New York times How do we compare to other Tax regimes? 15

16 Transportation Fuel and Taxes Source: 6/26/09

17 Proposed Direct New Taxes The average direct tax on transportation fuels of $3.3 billion/year equates to about 1% of gross revenue from domestic production for the upstream oil and gas industry in 2010. The direct program is equivalent to a new 1% royalty on domestic production. Companies which are domestically based and/or pursuing an aggressive drilling program fare worse than the average upstream player. 17 Source: Raymond James 3/30/09

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19 Historical impact of Crude Oil cost on Gasoline Prices

20 What about Coal?

21 Coal Production by Coal-Producing Region, 2007 (Million Short Tons and Percent Change from 2006) U.S. Total: 1,145.6 Million Short Tons (-1.5%) Source: Energy Information Administration, Quarterly Coal Report, October-December 2007 21


23 23

24 24 Electricity Profile


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30 Number 30 30

31 - Natural Gas


33 33

34 Center for Energy Studies Methane Ethane Propane Butane Wet Natural Gas Residential, Commercial, Industrial & Power Plants Ethylene Propylene Butylenes Xylene Toluene Agricultural Chemicals Foam Food Packaging Insulation Carpeting Paints Dry Cleaning Furniture Fiber Pipe & Fittings Bottles Resins Auto Parts Pharmaceuticals Cements Detergents Adhesives Lubricants Tires Toys Cosmetics Textiles Components of Natural Gas and where they end up 34

35 End Use Consumption by Sector And Region, 2002

36 Conventional Gas Production History by Vintage Year, An Accelerating Decline Rate 36

37 State Population (thousands) Therms (millions) Therms per capita Hawaii1,2732822 Maine1,3188867 Florida17,7681,39779 Vermont62285136 Arizona5,953863145 New Hampshire1,307250191 North Carolina8,6722,024233 Connecticut3,5011,028294 South Carolina4,2471,271299 Virginia7,5642,294303 Washington6,2921,940308 Nevada2,412782324 Maryland5,5901,828327 Rhode Island1,074367342 Massachusetts6,4332,275354 Tennessee5,9562,197369 Georgia9,1333,382370 Oregon3,6391,398384 Missouri5,7982,382411 Idaho1,429588412 Delaware842347412 California36,15415,272422 South Dakota775333430 New Mexico1,926839436 New York19,3168,588445 Pennsylvania12,4055,863473 Utah2,4901,202483 Sources: Population - Therms - * Excludes natural gas burned for electricity generation State Population (thousands) Therms (millions) Therms per capita Mississippi2,9081,406483 Alabama4,5482,238492 West Virginia1,814899496 Kentucky4,1732,091501 United States296,507149,466504 North Dakota635331522 District of Columbia 582322553 New Jersey8,7034,853558 Arkansas2,7761,570566 Montana935561600 Nebraska1,7581,084617 Minnesota5,1273,259636 Wisconsin5,5283,548642 Colorado4,6633,189684 Ohio11,4717,990697 Oklahoma3,5432,502706 Kansas2,7481,962714 Iowa2,9662,126717 Illinois12,7659,180719 Michigan10,1017,597752 Indiana6,2664,970793 Texas22,92918,478806 Wyoming5096531,284 Alaska6638961,351 Louisiana4,5078,8451,962 37 Louisiana leads in per capita Consumption of Natural Gas Consumption by State in 2005*

38 Number 3 38

39 39 EIA Annual Energy Outlook 2009 Reference Case Presentation -- December 17, 2008 Unconventional production can meets growth in natural gas demand and offset the decline in conventional production Unconventional Alaska Net imports Associated-dissolved Non-associated offshore Non-associated conventional HistoryProjections trillion cubic feet

40  Declining conventional gas production  Increased need for power load following capacity  Gas “Farming” 18 months => 80% of cumulative production  Changes in technology  Horizontal Drilling  Improved Well Completion Techniques  Well perforation  Sequential Hydraulic fracturing Shale Growth Drivers 40


42 Unconventional Shale Gas Drilling, Vertical vs. Horizontal 42

43 Haynesville Shale Marginal Cost

44 U. S. $6.95 S. Africa $5.36 Russia $0.80 China $6.85 Indonesia $1.13 Cuba $3.34 Venezuela $0.65 Argentina $1.09 Australia $3.42 Mexico $4.12 Netherlands $4.25 Slovakia $3.35 W. Europe $4.12 Source: Energy Information Administration Middle East $0. 60 N. Africa $0.40 Industries may be forced to other countries where natural gas can be considerably cheaper World Natural Gas Prices for Industry ($US/MMBtu)

45 Renewable Energy’s Image Wind and Solar

46 PV Applications: Grid-connected homes PV systems for homes – Essentially reduces energy consumed from electrical grid – Use grid as a giant “battery” – Net metering is key to grid connected applications 46

47 Renewable Energy’s Fact #1- Hydropower

48 West African Deepwater Development Scheme Renewable Energy’s Fact #2 = Biomass Conversion

49 The Minor Role of Renewable Energy Consumption and Energy Supply, 2007 The Very Small Role of Solar and Wind Solar and Wind = (.01+.07)*.07 =.56% Source: Energy Information Administration, Office of Coal, Nuclear, Electric and Alternate Fuels

50 COSTS: As a general trend, clean-energy costs are falling as the costs of fossil fuel energy are going up. The future of clean tech is going to be, in some cases, about scaling up manufacturing and driving down costs. Source: EIA Annual Energy Outlook 2007, Assumptions, Table 39 Technology $/kW Capital Costs for Electricity Production

51 Hydroelectric Power Well-established technology Produces power reliably and at a competitive price Provides about 1/6 of the world’s energy and 90% of electricity from renewables 51 Hoover Dam, Nevada-Arizona

52 U.S. Technical Potential 52 RegionTechnical Potential (TWh/yr) Annual Output* (TWh/yr) Output as % of Technical Potential Asia509357211% S. America279250718% Europe270672927% Africa1888804.2% N. America166866540% Oceania2324017% World14379259318% *Based on average output for the four years 1999-2002 Source: Adapted from WEC, 2003b and BP, 2003

53 Three Gorges dam, China 20 Gigawatts = 20,000 megawatts 53

54 Environmental/Social Issues 54 Lines on sign show future water level New housing on cliff

55 55 CO 2 Emission Cuts – Costs of the EPA’s Proposed ANPR

56 IPCC-2007 FAQ

57 Ice Age Forcing and Response [After Figure 6.3, ©IPCC 2007: WG1-AR4] IPCC-2007 FAQ T = Tilt in Earth’s axis P = Precession E = Eccentricity

58 IPCC-2007 FAQ

59 Last Ice age Last interglacial What Causes Global Warming? [After Figure 6.3, ©IPCC 2007: WG1-AR4]

60 60

61 2005 State Emissions by Sector (Million Metric Tons of Carbon Dioxide)/year StateCommercial Electric PowerResidentialIndustrialTransportationTotal AK2.13.21.822.218.748.1 AL1.881.62.821.334.8142.2 AR2. AZ2. CA13.942.128.276.9234.4395.5 CO4.140.87.613.729.996.0 CT3.710. DC1. DE0. FL5.4127.51.913.8114.0262.6 GA3.585.37.620.269.1185.7 HI0. IA3.635.84.715.921.381.3 ID1. IL11.893.624.741.978.3250.4 IN5.5122.69.454.446.0237.9 KS1.837.24.011.917.972.8 KY3.092.63.920.333.9153.8 LA2.043.02.584.750.9183.1 MA6.624.614.84.834.385.1 MD4.932.37.26.732.383.4 ME1. MI10.975.923.425.456.6192.3 MN6.135.68.914.937.5103.0 MO4. MS1.425.11.89.825.263.1 MT1. NC4.874.76.715.953.4155.6 ND1. NE1.721.42.55.812.343.6 StateCommercial Electric PowerResidentialIndustrialTransportationTotal NH1. NJ11.219.316.915.970.0133.4 NM1.732. NV1.726.42.32.717.050.1 NY28.756.139.114.473.9212.2 OH10.9133.020.537.672.0274.0 OK2.449.43.721.430.8107.7 OR1. PA12.7124.823.949.972.7284.0 RI1. SC1.640.12.311.430.686.0 SD0. TN3.555.04.417.145.9125.9 TX10.4229.312.1179.4194.0625.2 UT2. VA5.541.98.519.055.7130.6 VT0. WA3.314.15.017.443.983.8 WI6.348.89.716.331.1112.1 WV*1.885.32.112.612.5114.3 WY0.843. Subt otal225.12,386.4364.8994.12,007.65,978.0 EIA Energy Emissions Data - 10/2009 3.8% 39.9% 6.1% 16.6% 33.6% 100%

62 U.S. Carbon Dioxide Emissions By sector and fuel for 2007 actual and 2030 projected (million metric tons) EIA Energy Emissions Data- 10/2009

63 Climate: McKinsey’s Power Sector Emissions Reductions Estimate Source: McKinsey Quarterly 1, 2007. “A cost curve for greenhouse gas reduction”

64 Economic Analysis of the EPA’s Advance Notice of Proposed Rulemaking Proposes to reduce CO 2 emissions levels to 70% below the levels that existed in 2005, by 2050 Implies a cumulative loss in GDP of $ 6.8 trillion by 2029 Implies annual non-farm job losses that peak at ~800,000/year Manufacturing jobs decline by 22.6% or 2,880,000 on top of a built in loss of 980,000 due to efficiency gains. Specific sectors will be severely impacted Specific states will be severely impacted Louisiana loses on both fronts 64

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69 Economic Analysis of the EPA’s Advance Notice of Proposed Rulemaking II Durable Manufacturing down by 28% Machinery mfg. down by 57% Textile mill employment down 27.5% Electrical equipment and appliance mfg. down 22% Paper business down by 36% Plastics and Rubber products down by 54% States with manufacturing intensity >1 will experience more severe losses. Manufacturing intensity in Louisiana is #2 in the nation at 1.95 69

70 What’s the Government Strategy? Politicians want to reduce consumption of hydrocarbon transportation and power generation fuels Since these are the most economically efficient fuels, they need to raise and enforce taxes, both direct and indirect, in order to favor less economic alternatives. However, taxing consumers directly, results in the rapid replacement of lawmakers. The latest government plan suggests $33 billion of higher indirect taxes on the upstream sector. In addition, EPA plans to also use the Clean Air Act to go after downstream industry and utilities at an initial annual cost of $79 billion rising to over $600 billion by 2030. The hope is that indirect taxes achieve the same results (higher prices for fuel and power) but with voter ire directed at suppliers, not policy makers. The Game Plan depends on the collective culpability of the voting population 70

71 Estimated effects of the EPA’s ANPR (Advance Notice of Proposed Rulemaking) Proposal is to reduce CO 2 emissions levels to 70% below the levels that existed in 2005, by 2050 Implies a cumulative loss in GDP of $ 6.8 trillion by 2029 Implies annual “non-farm” job losses that peak at ~800,000/year Manufacturing jobs decline by 22.6% or 2,880,000 on top of a built in loss of 980,000 due to forecasted efficiency gains. “Cap and Trade” would add a climate related tax to the total tax bill in 2012 of ~$79 billion or about.5% of GDP. This would escalate to over $600 billion by 2029 Specific sectors will be severely impacted Multiple states will be severely impacted Louisiana will be severely Impacted 71

72 ”Cap and binge” Combating climate change will be expensive, swapping cheap fuels for cleaner but dearer ones. It also requires building new power plants to replace older ones. The public and business will pay more for energy supplies required to run the country. Bottom line is that the cost per ton of CO 2 removed will escalate from approximately $15/ton for a pure cap and trade system with no exemptions to somewhere between $69 and $137/ton once all of the “special” situations are covered. You would expect states that rely on coal will suffer the most, unless protected by government exemptions. Those that produce and refine petroleum will also suffer and will not be protected by exemptions. Far better for the government to focus on handouts for low tech energy efficiency improvements (doors, windows, insulation etc.) as well as on enhanced R&D spending on new technology. In both the latter cases the stimulus effect is almost immediate. 72 Source- The Economist

73 Cost: Impact of a Carbon “Tax” 3. 0 4. 0 5. 0 6. 0 7. 0 8. 0 9. 0 10. 00 01020304050 Levelized Cost of Electricity by Source Wind @ 29% CF IGCC w/o CCS NGCC @ $6 gas Biomass NuclearPulverized Coal w/o CCS Energy Efficiency Cents per KWh Carbon price: Dollars per ton Source: ACEEE, 2007

74 Alternative Policy Recommendations 1)Reduce the rhetoric on CO 2 and plan on having a sustainable economic environment. (That’s what China and India are doing). 2)Return the CO 2 debate to a discussion of time frame and causality. Do more work on the climate models. 3)Spend stimulus money on low tech solutions and on high tech research. 4)If politically necessary, increase direct taxes on gasoline and diesel to reduce consumption and increase the viability of renewable fuels, but don’t hide behind mandates and regulatory administrative interpretations. Just tax the fuel at the pump. The mechanism exists and the tax rate can be varied easily to meet unpredictable changes in crude cost. 5)Whatever the political decisions “grandfather” in investments that result from those decisions. Otherwise there won’t be any investments. 6)Use science and economics to set standards and regulate industry. These long term issues should not be subject to re-election cycles ranging from 2 to 6 years. Nothing is going to be approved, installed or amortized if policy continues to change every two years. 7)Beware unintended consequences, most recently seen with the food vs. fuel debate. 8)Beware IPCC and NASA climatology models. They come with an agenda. 74

75 - Questions?

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