A California Solar Dilemma

After grappling with the thought experiment of replacing all of our electricity consumption with solar panels, the problem came into focus. This problem seems simple, but it isn’t trivial. As I mentioned, I have seen people approach this problem in several different ways, and after tackling it myself I believe that all of those approaches are wrong. So, I decided to produce a graph to help illustrate exactly how I see the problem:

Typical Solar Cell Power Curve vs. Actual California Demand Curve on July 12, 2003

The way I came up with this graph was by modeling the solar cell power curve based on Google’s Solar Panel Project, which they update daily for solar electricity produced. You can presume at this point some hypothetical number of panels to produce 36 GW at peak power. The reason for 36 GW is that I found a presentation that showed actual load behavior in California on a summer day in 2003, and peak power demand was 36 GW.

It became clear to me why some people are approaching this from different directions, and why neither answer is actually correct. One approach looks at peak demand, and installs enough solar panels to meet that. But as you can see, peak demand doesn’t correspond to peak output. The second approach looks at the demand for the entire day, and then attempts to produce that in 4 or 5 hours. That isn’t correct either. You need to produce the required daily output in the total area under the solar power curve. But, you need to be able to store it. And due to storage losses, you actually need to produce quite a bit more than you expect to be consumed in any particular day.

That, I believe, is the correct way to solve the problem. In all of the approaches I have seen as I have studied the problem, I haven’t seen this specific approach. Thoughts? Just eye-balling it, it looks to me - presuming you have a workable storage solution - that you would require about double the power of the peak demand number in order to produce the required energy each day. In other words, if that solar power curve topped out at 70 GW or so, that would be enough energy produced in a day to meet that demand curve.

I don’t have time to work on this any more right now, but I will come back to it. My chapter is due on August 1, and I am still tidying it up. But I think the next approach is to either integrate the area under the solar output curve, or approximate it as a square wave - and then develop the relationship to daily demand.

Prop 87 Post Mortem

Well, I was wrong. I have consistently predicted that California’s Proposition 87 would pass. I knew that support had been slipping as gas prices have fallen, but I still thought that when the time came to vote, the voters would choose to punish the oil companies. But Prop 87 looks to be headed toward a sound defeat tonight.

What Went Wrong

I can point to numerous things that went wrong with the “Yes” campaign. While I really was pretty ambivalent about the initiative, I was not ambivalent about the tactics that the “Yes” campaign utilized. Several months ago I commented to a person that was associated with the Yes campaign that it almost seemed like they were running a parody of a political campaign. They displayed a stunning level of naivety over energy issues and energy policy.

The L.A. times characterized this initiative as “deceptively marketed”, which was also the title I chose for my first Venture Beat article on the initiative. The California papers almost unanimously opposed the proposition. So, the Big Oil hate-mongering from the Yes camp rang a bit hollow when all the newspapers were editorializing against it. Were they all in the camp of Big Oil? Were Vinod Khosla’s hometown papers, all of which endorsed a no position, in the camp of Big Oil?

I found it very difficult to read Vinod Khosla’s essays in favor of Prop 87. I felt like most of it was very condescending drivel, more appropriate for a grade school audience. He would have been taken a lot more seriously had he stuck with the facts, and avoided all of the emotional pleas to punish oil companies. Clearly, he hates the oil companies. We got it. But as he continued to write, I was just waiting for him to claim that refinery boilers are fueled with homeless children.

There were also a number of times that the Yes campaign demonstrated that they didn’t even know what was in the initiative. An example of this was reported last week at the No on 87 website:

KGO-AM’s Ronn Owens hosted a spirited debate over Proposition 87 (the $4 Billion Oil Tax Initiative) in San Francisco today.

I went up against Beth Willon, who represented the Yes on 87 campaign.

At one point Willon tried to make the argument that Prop. 87 “will only last 10 years.”

I responded by pulling out the actual initiative text and reading Section 26029.4 which states “the authority may be terminated at any time by the Legislature no sooner than January 1, 2027 or after the assets of the authority have been fully expended, whichever is later.”

Beth’s only response was that I was reading “very deep” in the initiative text. Somehow I think the “deep” parts count too.

It would be funny if it weren’t such a serious subject. The proponents also frequently characterized this as an excess profits tax, when it was actually a severance tax. The difference is that even when oil companies are in a down cycle and profits are much lower (or nonexistent), they get to keep paying the severance tax.

But I think the thing that really persuaded people to vote “no” was the uncertainty of the impact on gas prices. I was with the vast majority of economists in my belief that this proposition would drive up gas prices. But the overall amount was uncertain. The initiative would have impacted the supply/demand balance in California, with uncertain results.

I am certain I could have come up with a better proposition to promote alternative energy. I believe the voters would have supported a nickel a gallon gas tax increase with the proceeds going to fund alternative energy. That way, the price increase would have been known. In fact, since higher gas prices correlate with lower demand, a nickel gas tax increase might not have caused gas prices to increase by a nickel. And I don’t think the oil companies would have come out so strongly in opposition. And when you run a campaign that essentially paints the opposition as being responsible for all of society’s ills, you better make sure your nose is clean. In this case, Mr. Khosla’s engaged in quite a bit of hypocrisy, and that was used effectively against him.

I don’t doubt some new version of Prop 87 will be resurrected in the future. If any of you proponents are going to try this again, feel free to send me an early draft of the initiative and I would be glad to critique it for you. But get someone else to run your campaign the next time around.

Note: I am going to be out of town for the next few days with no access to the Internet, but I did want to offer up my thoughts on the election as soon as the results were clear.

People in Glass Houses

VentureBeat, a Silicon Valley-based site that focuses largely on venture capital (and venture capitalists), has been hosting a series of essays on California’s Proposition 87, which will be voted on next Tuesday. The owner of Venture Beat, Matt Marshall, recently contacted me and asked if I wanted to provide some “No on 87” essays in response to Vinod Khosla’s series of “Yes on 87” essays. My response to Matt was that I am ambivalent about passage, and so would not write a “No” essay. However, he said that if I wanted to write on alleged misinformation coming from the “Yes” camp, then that would be OK as well.

My first essay, Prop 87: Deceptively Marketed, addressed 3 specific claims coming from the proponents, and then I offered up my predictions. In the second essay, I went directly after a number of irresponsible claims that Vinod Khosla made in his second essay. Mr. Khosla is essentially betting people’s lives by making the claims he is making. If, ten years down the road, it becomes clear that he can’t deliver, we will have lost ten precious years in which we could have embarked upon a massive effort to deal with Peak Oil. But as long as there are Vinod Khoslas out there, naively making promises that everything will be OK, that massive effort will be delayed. Our energy policy is far too important, so I believe Mr. Khosla’s promises should be vigorously challenged.

Below is the text of my rebuttal to Vinod Khosla’s claims, which can be found in essays that he wrote for VentureBeat and The Huffington Post. Please note that I am not arguing for a “No” vote, nor am I making a blanket defense of the oil industry. I am responding to Mr. Khosla’s claims.

————————————-

Apparently some Proposition 87 proponents have never heard the adage “People in glass houses shouldn’t throw stones.” They complain about slimy tactics, while engaging in plenty of slimy tactics and hypocrisy themselves. In this essay, I will address Mr. Khosla’s second essay and show that his glass house is vulnerable to my pile of stones. This is also why I become concerned when people with expertise in one field try to influence policy in another. My dentist is a great guy, and very good at what he does, but I wouldn’t let him remove my appendix. And while he should certainly be involved in the discourse, he shouldn’t receive undue influence on energy policy just because he is a good dentist.

I explained in my previous essay who I am, and that I am not campaigning against Proposition 87. My interest is in raising the level of political discourse with respect to energy policy. My criticisms are aimed at the “Yes on 87” campaign, because much misinformation is being directed at my own industry. I find it very ironic that those who are flying around the country to decry the “evil oil industry” are doing so using jet fuel supplied by the oil industry. They enjoy many conveniences as a result of oil and gas production, but have deluded themselves into believing their lifestyle could be maintained if we all switched to alternative energy.

I don’t live in California and have never seen an ad from either side, but I have seen a number of “Yes” essays in the mold of Mr. Khosla’s latest missive. So let’s dissect his latest entry for some examples of hypocrisy, misinformation, and faulty logic. Mr. Khosla’s comments are in quotes.

Given the current oil situation the ONLY way oil prices will go down is if we have alternatives to oil.

Since it doesn’t benefit any big business interests, conservation, probably the most valuable “alternative” out there, is mostly overlooked in this debate.

Mr. Khosla: Given the massive profits they make on oil they wouldn’t want a cheaper alternative in the marketplace.

I covered profit margins in my previous essay, and noted the hypocrisy coming from an industry that sees double the profit margins of the oil industry. But “they wouldn’t want a cheaper alternative” is misinformation. The entry barrier for ethanol production and biodiesel is quite low. If ethanol is ultimately a cheaper option, oil companies will start making ethanol. Right now, most do not see that it is clearly viable in the long-term without subsidies. In fact Mr. Khosla was recently quoted in Red Herring: “Contrary to what you might believe, I think it’s extremely unlikely that in 20 years we will be using any ethanol in cars.” I think the oil industry shares this view, which is why they aren’t rushing out to build ethanol plants.

However, oil companies have made big investments into solar, wind , and biofuels. In fact, Iogen, a company running a large scale cellulosic ethanol trial, is receiving major funding from Shell. Of course this puts oil companies in a “damned either way” position. If they invest in alternatives, critics say it is a token effort, or just for public relations. If they don’t, then they are standing in the way of progress.

It is also unfair if they use their political clout to wrangle billions of dollars of subsidies from American taxpayers.

Given that the ethanol industry receives billions in direct subsidies and you are trying to secure even more with Prop 87, I am going to call this a bit of hypocrisy. The ethanol industry is the recipient of $0.51 gallon in direct ethanol subsidies. However, the subsidy is per gallon of ethanol produced, as opposed to actual net energy produced. If the ethanol energy return is 1.3/1, then it takes 3.3 gallons produced to net the energy equivalent of 1 gallon of gasoline. The website Zfacts, strongly supportive of alternative energy, concludes that when all the subsidies are added in, displacing a single gallon of gasoline costs $7.24 in ethanol. Furthermore, the ethanol industry depends on fossil fuels to drive their trucks and tractors, so any oil “subsidy” is also an indirect ethanol subsidy.

Many ethanol advocates claim that the $0.51/gallon subsidy actually benefits the oil industry. Without going into a detailed analysis of why this claim is wrong (it essentially allows ethanol producers to charge $0.51/gal more than market conditions would warrant), ask yourself why it is the ethanol/farm lobby who is fighting to keep this subsidy, and oil interests who are speaking out against it. Note that the executive vice president of the American Coalition for Ethanol vigorously defends the subsidy. Is this a case of oil company benevolence?

And they often make us pay for their R&D.

As compared to making your competitor pay for your R&D? I will admit, it is a brilliant move to force your competitor to fund your own research, but the above statement really takes hypocrisy to a whole new level.

The world uses about 12 billion gallons of ethanol today. If that was removed form the market, oil prices would spike up. If we produce more, oil prices will decline as supply increases.

This one is just faulty logic. Ethanol production in the past few years has exploded. Did oil prices decline?

A few token projects to “sound green” are thrown in but almost no money goes into finding real alternatives to oil.

As I stated earlier: “Damned either way.”

Even the small technology oriented Silicon Valley company can spend 20% of its revenue on R&D.

I have an idea then. Since Silicon Valley is so innovative, and we know that companies there are quite profitable, why don’t we tax them to fund this measure? That seems like a real win-win solution. The people who most strongly support this proposition will be the ones who will both pay for it, and “benefit” from it.

The oilies are scare mongering with their massive dollars.

We actually prefer our pejoratives to be capitalized. But this is an example of the need to raise the political discourse. Also - and feel free to correct me if I am wrong - the proponents are spending tens of millions of dollars to push this measure, and they are doing it with tactics that have been more along the lines of hate mongering.

President Clinton has said ethanol is 33% cheaper. I know it is cheaper to produce, even with the subsidies oil currently manages to get.

Ignoring the repeated hypocrisy over the subsidies, let’s talk about economics. Now, I may not be well-versed in Silicon Valley economics, but here’s what I think. If I have a product that I can make for cheaper than the competitor, why would I need mandates, subsidies, and an extortion tax on my competitors in order to compete? I don’t really think I would need this, if indeed the claim is true. So, that leaves me to believe that either the claim isn’t true, or ethanol companies are worse than oil companies at “ripping people off.”

Let’s consider the following graph from the official Nebraska government website:

This is a comparison of the average annual rack price of ethanol versus mid-grade gasoline for the past 25 years. Ethanol, with lower energy content, has been more expensive than gasoline in each of the past 25 years. So there is a track record over a long period of time that suggests that not only do ethanol prices rise and fall in response to gasoline prices (putting a damper on the argument that ethanol is going to drive down gasoline prices) but the price differential is actually greater since most people don’t buy the more expensive mid-grade.

Now, if Mr. Khosla is correct, and it is in fact cheaper to produce ethanol than gasoline, it suggests that 1). Ethanol profit margins are far higher than gasoline profit margins; 2). Ethanol producers are “ripping us all off”; and 3). Ethanol producers should have no problem funding their own growth.

I hope that Mr. Khosla can see that his glass house is quite vulnerable. I call on him to raise the level of discourse on our energy policy - regardless of the outcome of the vote.

Addressing Proposition 87 Criticisms

Background

Voters in California will go to the polls in November to decide the fate of Proposition 87, also known as the Clean Energy Initiative. However, the ramifications of this proposition have the potential to be felt nationwide. I have previously written a pair of essays on Proposition 87 that you can find here and here. My position is not so much that I am against Prop 87, and I am certainly not against the intent of Prop 87. But I do have concerns about the proposition, which are explained in my previous essays.

In response to my essays, Dr. Ana Unruh Cohen, former Rhodes Scholar and the Director of Environmental Policy at the Center for American Progress, asked if I would mind posting a rebuttal from her. Ana is certainly no stranger to the Peak Oil debate; her father was the person who got me seriously interested in the subject. I think most of us share a desire that we pursue responsible energy policy, and I believe that through a civil airing of diverse ideas we can better determine just what constitutes responsible energy policy. One of the things I find most enjoyable about debating these issues is that it gives me an opportunity to learn from others, and my views can evolve as a result of the things I learn. With those things in mind, I am happy to offer up her rebuttal to my previously mentioned essays on Prop 87.

Disclaimer: To my knowledge, my company has donated no money to the Prop 87 opposition group (I don’t believe we extract oil from California). I have nothing to gain financially by supporting or opposing this measure. So, consider me an unaffected party. I will offer my own take on Prop 87 in a few days, after which Ana will have the opportunity to have the final word with a concluding essay if she wishes.

Without further commentary, here are Ana Unruh Cohen’s views on Proposition 87.

Introduction

Thanks for the opportunity to respond to your post about California’s Proposition 87. As way of introduction and full disclosure for your readers, I am Ana Unruh Cohen, the Director of Environmental Policy at the Center for American Progress in Washington, DC. My boss, John Podesta, is on the Leadership Council for Prop 87. I have been involved the initiative for over a year now when a group of concerned Californians, mostly with environmental or academic backgrounds and months before Vinod Khosla was involved, approached Podesta to participate. (More about the early history of Prop 87 is here [RR edit: Requires registration].) He agreed, appointed me his liaison, and it’s been an interesting experience ever since.

(For really full disclosure, I met Robert through my father. They worked together for many years and are good friends. I have asked Robert many questions about energy issues over the past few years and try to read his blog regularly.)

But why should a DC-based policy analyst or anyone outside of California care about Prop 87? As the most populous state and the largest gasoline market in the nation, success in reducing oil consumption there could have national repercussions. The new technologies that get kick-started and the lessons learned from deploying them through Prop 87 will have benefits far outside the borders of California. This is also the first time voters are going to have the opportunity to vote for reducing oil consumption.

Robert outlines a number of concerns in his post that in my mind fall into two distinct areas policy – what the initiative would do and what the impacts would be in the future - and politics. For clarity, I will address the two types of concerns separately as best I can, although in some cases they are very closely intertwined.

I’ll start with policy issues and their future impact. I will place references to the initiative language in parentheses (pg. x) at times. You can download a pdf of the initiative language here.

Support for Ethanol

One of Robert’s primary concerns is that Prop 87 would funnel money to corn ethanol. Ethanol, of all kinds, would be one option that the California Energy Alternatives Program Authority could consider as a way of meeting the goal of saving 10 billion gallons of petroleum transportation fuels between 2007 and 2017, including 4 billion annually starting in 2017 (pg. 3). The initiative language does not designate any technologies to be used but leaves that to the Authority to determine. The Authority – a reinvigorated existing California entity – will consist of 9 members, 3 state officials and 6 citizen experts appointed by various senior elected officials. No member of the Authority will be eligible to apply for any of the initiative programs (pg. 5-6), and they will be bound by all of California’s ethics laws. I expect the Authority to continue in the long tradition of excellence in public service seen in other Californian boards of this kind.

Furthermore, the initiative language instructs the Authority to assess fuels based on their full fuel-cycle and greenhouse gas emissions (pg. 22), which will lead to a rigorous evaluation of petroleum reduction and climate impact on which the Authority can base its decisions. The initiative programs must also compliment ongoing California environmental programs, like the greenhouse gas tailpipe standard and the governor’s climate program (pg. 3, 18, 21, 223). Ethanol might get some support, but I expect many other technologies and programs that will help reduce oil consumption will also receive robust funding. Despite Robert’s fear, I believe the funds raised will be deployed in an efficient way.

Impact of Oil Royalty

While you are about to read more than a few paragraph on prices, I would like to say at the beginning that the goal of Prop 87 is to reduce the use of oil, which I believe will ultimately benefit the people of California economically and environmentally no matter where the market takes the price of oil.

Another big concern of Robert’s was the oil royalty the initiative would put in place and its impact on the industry and the price of gasoline. Robert argued that the royalty would ultimately raise the price of gasoline and also that California’s current gasoline tax ensures the state is receiving adequate compensation for the oil companies’ use of its natural resources. I will take each of these points in turn.

On the issue of passing on the assessment to consumers, there are legal precedents, right up to the U.S. Supreme Court in Exxon vs. The State of Alabama (1983), upholding the consumer protections that prevent the fee being passed on directly to consumers. The California Attorney General has confirmed that the initiative prohibits producers from passing taxes on to the consumers.

But what about the more indirect way that Robert suggests? In the near term, California will remain the largest gasoline market in the country and an important market for the oil companies. In a world where supply and demand for oil are so closely matched, it is hard to imagine any company reducing production because of the imposition of a small royalty. Robert quotes a 1990 Congressional Research Service report about a decline in domestic production from a windfall profits tax, but the landscape of oil supply and demand was very different in the 1980’s than it is today. With almost no excess production capacity in the world now and rising global demand, oil producers will continue to pump what they can. In this instance, I don’t think the past is necessarily prologue.

Robert also does a quick calculation of the royalty’s cost per barrel. He uses a price of $75 per barrel, which I assume he is taking from the NYMEX future prices, but the royalty is based on the wellhead (gross value) price of oil (pg. 28). In California, wellhead prices typically run $10 to $20 below the futures prices. The royalty is also graduated so that when the price per barrel is low, the royalty is at its lowest. California imports 40% of its oil from foreign sources and 20% from Alaska with the remaining produced in California. With the current problems in Prudhoe Bay, the recent change in Alaska’s oil tax law and the increasingly competitive nature of the global oil market, it appears oil from California – compared to imports from Alaska or abroad – will remain attractive to refineries looking to purchase the cheapest crude.

And, yes, oil companies will have to pay $4 billion over 10 years to the new trust fund for clean energy. Because I believe oil prices and oil company profits will stay high over that time, I think they will be able to find the money. After all, the oil companies have to deal with royalties in all the other large oil producing states and on federal lands when they make their financial decisions. And at the moment, they seem to be favoring their shareholders, since the six majors spent more on share repurchases and dividends ($74 billion) than on capitol investment ($71 billion) in 2005 according to a BusinessWeek story. Moreover in 2005, ExxonMobil was able to compensate their retiring CEO, Lee Raymond, $400 million, roughly the same amount California would collect annually from all oil companies pumping crude from California’s natural resources when Prop 87 passes.

Robert also argues that oil companies are paying their fair share in California because of the high gasoline tax, but a gasoline tax serves a fundamentally different purpose than an oil royalty. Drivers pay gasoline taxes. Gasoline retailers just collect them. Typically tax on a gallon of gas serves as a proxy for road usage and the revenue is used for transit funding. Oil royalties on the other hand are a way to return some of the value of natural resources to the government for allowing oil companies to extract material from the public commons. They are paid for by the producers who are profiting from the extraction of oil from the state. Because they serve two different purposes, almost all other states and the federal government impose both a gasoline tax on drivers and an oil royalty on producers. Why should California be any different?

Robert quotes California’s gas taxes at $0.32/gallon. Here’s the breakdown that the California tax board provides. You will see that California charges sales tax on motor fuels – another public policy decision and another tax borne by drivers, not oil companies.

Robert also argues that oil companies are paying a price by not selling as much gasoline as they might otherwise with lower gasoline taxes. But this logic suggests that every public policy decision that reduces the amount of product a corporation sells would somehow count towards their contributions to the state or federal treasury. Should we compensate oil companies when the government raises vehicle efficiency standards because they will sell less gasoline? Should we compensate coal companies when the government raises air quality standards because they will sell less coal? Should we compensate utilities when building codes are improved to make houses more efficient? I don’t think so, and I don’t think we should consider the gasoline oil companies didn’t sell when considering whether or not they are adequately compensating the people of California for access to their oil resources.

Robert also makes many allusions to Hugo Chavez (perhaps straying into a little demagoguery himself) and is concerned that Prop 87 would open the door to other economic burdens on the oil companies. We can’t predict the future, but the initiative is explicit that the royalty will sunset after $4 billion has been raised (pg. 30). The legislature would have to act or another ballot initiative would have to pass to extend the royalty. In drafting the initiative, we had many discussions about what would really be needed financially to meet Prop 87’s goals and feel that $4 billion used judiciously will be enough to meet the challenge.

Will Prop 87 Work?

Robert quotes at length an article originally from the Wall Street Journal that argues that California’s past attempts to reduce oil consumption have failed. I would argue that California’s programs have been at least a moderate success. Every single program may not have succeeded, but on the whole California has maintained a smaller growth of gasoline consumption over the past decade than the overall increase in gasoline consumption in the United States. That has to count for something. Even with a growing population and economy, they have managed to keep their gasoline use somewhat in check. Don’t take my word for it. Check out the EIA’s data for yourself. Moreover, while California might be the largest gasoline market in the United States, only six states and the District of Columbia use less gasoline per capita than California. There has to be some reason that California is doing better than most states and the United States as a whole, and I bet part of the reason is those same allegedly failed programs.

There is no denying that the goals of Prop 87 are challenging. That’s why we took a comprehensive approach when writing the language. We knew that areas not usually thought of as helping reduce oil consumption — like public education, training new workers, and partnering with entrepreneurs to bring their products to the market — would be necessary in addition to the traditional programs used to save oil. We also wanted to compliment and enhance the public policy decisions the people of California have already made, which in some instances have not received the necessary funding to implement.

The Campaign

Now let’s turn to the politics of the campaign. Its impact goes beyond those who work for the oil industry or might benefit financially from Prop 87 to everyone who uses petroleum in some way. It is hard for anyone to be disinterested.

So are oil companies paying their fair share in California as the Yes on 87 campaign ads ask? I would argue no. Without some royalty on oil produced from the state, I think Californians are being shortchanged. Other natural resources in California, like timber and water, are assessed a fee for their extraction. Why should oil get special treatment?

Robert is also concerned that Vinod Khosla’s investments in alternative energy create a conflict of interest. There are lots of interests involved in the campaign for and against Prop 87. The oil companies have produced oil royalty-free in California for a long time, and they aren’t interested in starting now. On the other side, California scientists working on clean energy technology could get an increase in their research funding. Community colleges could get new money to prepare workers for new technologies. Public health advocates could get air quality improvements. Mayors could get help converting their bus fleets to hybrids or biodiesel. Drivers could get help buying more efficient vehicles. On Nov. 7 Californian voters will have to decide which interests they want to support.

As for the campaign vilifying oil companies, vilification, much like beauty, is in the eye of the beholder. I know oil companies are made up of more than their CEOs. I have friends and family who work for the oil or related industries. They are hard working individuals trying to do a good job. They are not villains. Sometimes they are even heroes, like the workers who blew the whistle on the Prudhoe Bay leaking pipelines. But have the oil companies help fund global warming deniers? Yes. Have the oil companies helped prevent progress on federal policies to improve efficiency, support renewable energy and reduce greenhouse gas emissions? Yes. Is it fair to ask the voters of California to support Prop 87, which would impose a small royalty on oil produced in California and direct the revenue to clean energy programs in their state? I think so. (Do I wish political discourse in this country were more sophisticated and less sensational? Absolutely.)

I hope this gives everyone some new insight into Prop 87. I would be happy to answer questions on the blog or directly at aunruhcohen@americanprogress.org. More information from the campaign for Prop 87 is available at Yes on 87.

More on California’s Proposition 87

Previously, I wrote an essay describing exactly why California’s Prop 87 will raise gasoline prices for Californians:

California’s Proposition 87

Yesterday, the Yes on 87 campaign put out a strange press release. It read in part:

LOS ANGELES, Aug. 24 /PRNewswire/ — The following memo was sent to the CEO’s of ExxonMobil, Shell, Chevron, and other oil companies opposing Prop. 87:

TO: CEOs of ExxonMobil, Shell, Chevron, and other oil companies opposing Prop. 87

FROM: Chad Griffin, Campaign Manager, Yes on 87

RE: Staffing Changes at No on 87

The full page New York Times ad run yesterday by your national political operation — the American Petroleum Institute — highlighted a messaging problem within your California campaign against Proposition 87. The ad stated: “… the global price of crude oil is the single most important factor in what you pay for fuel at the pump.” (Please see the full text of this ad, which I have attached.)

As a professional, I feel compelled to inform you that your California agents are taking your money and taking you for a ride.

The oil companies’ top flack in California, Chamber CEO Alan Zaremberg, has been saying Proposition 87 will increase gas prices at the pump. But according to the API “the global price of crude oil is the single most important factor in what you pay for fuel at the pump,” not local fees like the ones already charged in Alaska, Louisiana and Texas. Zaremberg is clearly off message and is clearly disregarding the oil industry’s talking points.

Bizarre. Do you see the problem? Chad Griffin, the campaign manager for Yes on 87, apparently thinks “the single most important factor” is synonymous with “the only factor.” After all, what exactly is he saying here? He is suggesting that Zaremberg is wrong in suggesting that Proposition 87 will increase gas prices, since the price of crude is the single most important factor in the price. Hey, I have an idea for California based on Mr. Griffin’s faulty logic. Why don’t they just increase gasoline taxes by $0.50 a gallon? Since gasoline taxes are not the “the single most important factor”, then raising gas taxes won’t affect the price of gasoline. At least it won’t if I apply Mr. Griffin’s twisted logic. Of course I should probably point out that placing an additional fee on a barrel of oil DOES increase the cost of crude.

Mr. Griffin, I am a professional myself. I know a lot about how gasoline is priced. I feel compelled to inform you that you are taking Californians and their money for a ride. Prop 87 will definitely raise gasoline prices. And you know the worst thing for consumers? Prop 87 proponents will have no accountability at all for this. If you are wrong (and you are), and Prop 87 increases gasoline prices, then how will you rectify that with the citizens of California? After all, a big emphasis of your campaign is that gasoline prices are too high. What is the accountability of the Prop 87 proponents if this measure pushes gasoline prices even higher? I think you realize that you won’t be held accountable. In fact, when prices go up as a result of this measure, my guess is that oil companies will once again be blamed. You will probably be the first to point the finger in their direction.

Remember, citizens of California, when the gap between gas prices in California and the rest of the country widens next year, this is who you can hold accountable. From the press release above:

Yes on 87, Californians for Clean Alternative Energy, a coalition of consumer advocates, public health and environmental organizations, scientists and business leaders.

Major funding by Steve Bing and Vinod Khosla.
P.O. Box 67205 Los Angeles, CA 90067
phone: 323.782.1045 fax: 323.782.1035

Disclaimer: While I work for an oil company, my company is not listed among those contributing money to the campaign against Prop 87. I have heard no information that my company is opposing this measure, so I definitely don’t pretend to speak on behalf of them. These opinions are solely mine.

Prop 87 Interview

I was interviewed yesterday by reporter Marc Strassman from Etopia News. There is a brief story, including a link to the interview, at:

California Politics Today #631

The interview went in a lot of different directions (not just Prop 87), and it lasted for almost an hour. It went pretty smoothly for the most part.

I misspoke on at least two occasions. Once, Mr. Strassman asked about Peak Oil, and said that most studies suggest that it will happen by 2010. I told him that I didn’t think it would be that soon, but I mentioned that the Hirsch report warned that we would need to begin preparations 20 years prior to the peak, and we are certainly within that time frame. However, to be certain, I don’t think peak oil is 20 years away, and it is possible that it will hit us by 2010. I didn’t mean to be dismissive of the possibility that we will peak by 2010.

The other occasion was near the end of the interview. I was asked about the possibility of an initiative like this coming to my state. I said something like “hopefully we can point to the failed initiative in California as a reason not to do it.” That didn’t come out right. I don’t want it to fail, I just don’t think it will do anything to reduce our reliance on fossil fuels. I think other options would have been better. And if it plays out like I think it will, I don’t want to see my state wasting money like that.

Finally, yeah I know it’s a blurry picture. It’s the only one I had handy.

California’s Proposition 87

Introduction

I have intended to write this essay for a couple of months, but I have really struggled with what I wanted to write. Voters in California will decide on Proposition 87 in November. I have a number of friends and acquaintances who support this initiative, and even one who helped write the language of the initiative. Therefore, this essay is difficult to write, as it may offend some people whose friendship I value.

I have no doubt that this initiative will pass, but I have a lot of problems with the way this campaign is being run, and how oil companies are being vilified in order to win support for this measure. To be certain, oil companies are looking after their own best interests and those of their shareholders in opposing this measure. But I believe proponents are pumping out a steady stream of misinformation, even as they accuse the oil companies of doing so. I also think some of the proponents are very naïve if they don’t think this will increase gasoline prices in California. However, I would like to see gasoline prices go up to encourage conservation. Ultimately, my struggle is with whether the end justifies the means, and whether the money raised will be funneled into the most appropriate areas.

Background

Proposition 87, commonly known as the Clean Alternative Energy Initiative, will impose a new wellhead tax on California oil producers. This is essentially what Hugo Chavez did in Venezuela - he decided he wanted a bigger slice of the petroleum pie and assessed additional taxes. At current prices, the new tax would amount to 6% of the value of a barrel of oil. If oil is selling for $75 a barrel, the tax on what the proponents call “excess profits” will amount to $4.50 per barrel. Proponents believe it will raise $4 billion in revenue from the oil companies, at no cost to consumers.

The initiative is being bankrolled by Vinod Khosla, and the proceeds will be directed primarily toward alternative energy, including Mr. Khosla’s ethanol interests. Mr. Khosla has said “just because I might benefit, doesn’t mean this isn’t a good idea.” True, but it creates a bit of a conflict of interest and gives rise to the potential that the funds raised will not be optimally deployed.

First, let me provide the links for the two opposing sides, so you can get more background information if you wish to do a bit of research:

Yes on 87

This is the website promoting the initiative, and they have lots of FAQs and background information. Opposing them, with their own set of FAQs is:

Californians Against Higher Taxes

Let me make it clear that I fully support alternative energy and conservation initiatives. However, not all alternative energy solutions are created equally. I have argued that corn ethanol, for instance, is undesirable for a number of reasons. Yet this initiative would funnel money toward corn ethanol, which is one reason I have a problem with it. It will help prop up an industry that already receives very generous government subsidies, while primarily just converting fossil fuels (natural gas, gasoline, diesel, coal) into ethanol. Corn ethanol promotes soil erosion, as well as herbicide and pesticide runoff into our waterways. On the other hand, the initiative would funnel money toward areas that I do support, like green electricity and biodiesel.

What Will Happen

I think the naïvety surrounding this initiative is stunning. Check out this passage from the Yes on Clean Energy site:

“Prop 87 would make oil companies — not consumers — pay their fair share for oil drilling, just like they do in Alaska, Louisiana, Oklahoma and even Texas. Oil prices will NOT increase. The California Attorney General has confirmed that Prop 87 makes it illegal for oil companies to pass the cost to consumers by spiking gas prices. And experts confirm the global markets won’t allow the oil companies to raise our gas prices either.”

This passage displays a stunning ignorance of how markets work, and how capital is allocated. Oil companies are going to be assessed $4 billion in new taxes, and consumers aren’t going to feel that? Please. Here is exactly what will happen. This is not speculation on my part; it is based on exactly how capital gets allocated.

When the initiative passes, oil companies will have a new tax to deal with in California. The returns on capital invested in California will drop, and it will be less profitable to extract oil in California. Each year oil companies determine where they will allocate capital to various refineries in the country based on expected returns on various projects. Refineries in various locations compete against each other for capital allocations, and now California will be at a bit of a disadvantage because they will be paying more for their crude. Not only will the returns from California be lower, but questions will arise as to when they might hold another initiative to increase the tax (ala Chavez). California refineries will get just a bit less of that capital, which over time will squeeze supplies. As gasoline capacity fails to keep up with demand, higher prices will result.

Now, pay attention to this next statement: One of the major proponents behind Prop 87 admitted to me that the scenario I laid out is likely, but he is counting on ethanol to step in and fill the gap. If you have followed my essays on ethanol, you know this is a great bit of wishful thinking. So, Californians will deal with higher gasoline prices. But guess what? I have no problem at all with that. It is the “truth in advertising” aspect of this that I have trouble with. And I also want to be able to say “I told you so.” The real irony of all of this, though, is that oil companies will be blamed for the higher prices and Prop 87 proponents will escape any accountability.

Paying Their Fair Share

Proponents have painted this initiative as a way to finally make oil companies pay their fair share in California. From a FAQ on the campaign:

“California deserves its fair share. Currently, oil companies pay California almost nothing to drill, while they pay billions of dollars in drilling fees to every other oil producing state. Prop 87 will set California’s oil drilling fees at levels similar to those in Oklahoma, Alaska, and Texas at no cost to consumers and with no increase at the pump. The California Attorney General has confirmed that Prop 87 makes it illegal for oil companies to raise gas prices to pass the cost of the fee to consumers.”

Here’s what proponents aren’t telling you. From Gasoline Taxes by State:

Oklahoma - $0.17/gallon
Alaska - $0.08/gallon
Texas - $0.20/gallon
California - $0.32/gallon

California has the 3rd highest state gasoline tax in the nation, behind only Hawaii and Nevada. I think California is getting their “fair share”, only they chose to get it in a way different from the other states mentioned. I would argue that having such a high gasoline tax has helped spur conservation more than if California had the $0.17 gallon tax of Oklahoma. This of course means oil companies are already paying a price by selling less product than they would if gasoline taxes were lower. The net revenue is probably about the same whether you have low gasoline taxes and an oil extraction tax, or high gasoline taxes and no oil extraction tax. What Prop 87 will do is put an oil extraction tax on top of one of the highest gasoline taxes in the country. That’s something proponents aren’t telling you.

Learning from History

Of course the U.S. has experimented in the past with windfall profits taxes. From a 1990 Congressional Research Service report:

“The windfall profits tax reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil.”

Of course in California’s case, it will reduce state oil production and increase imports from other states. It will make California more dependent on oil imports from other states. It will increase costs for California refiners. Even proponents have to understand that increasing the cost of oil produced in California is going to make importing oil into California more attractive.

Another article recently caught my eye. It deals with California’s many failed attempts at reducing petroleum dependence:

How California failed in efforts to curb oil addiction

Some interesting excerpts for those who are determined to repeat history:

“For a quarter century, California has pursued petroleum-free transportation more doggedly than any other place in the U.S. It has tried to jump-start alternative fuels ranging from methanol to natural gas to electricity to hydrogen. None has hit the road in any significant way. Today, the state that is the world’s sixth-largest economy finds itself in the same spot as most of the planet: With $75-a-barrel oil, and increasing concern about the role fossil fuels are playing in global warming, 99 percent of its cars and trucks still run on petroleum products.

Oil and auto companies say they’re justified in resisting government mandates to roll out alternative technologies when they’re not convinced consumers will buy them. Donald Paul, Chevron’s chief technology officer, says California regulators essentially tell industry officials, “We know what the answer is. You guys just spend the money and everything will work fine.” He adds, “History has not shown that that works very well.”

Proponents of oil alternatives are pressing ahead. An initiative set for California’s November ballot would hit oil companies with an “extraction fee” on every barrel of oil they pull out in California, a top oil-producing state. The fee would range from 1.5 percent to 6 percent of the oil’s value, depending on the prevailing per-barrel price. Backers say the measure would raise $4 billion, which would fund research into alternative-fuel technologies and incentives for consumers and fleets to buy alternative-fuel vehicles.

The initiative is bankrolled by entrepreneurs including Vinod Khosla, a Silicon Valley venture capitalist who has been investing in ethanol and other alternative-energy businesses.”

The final paragraphs of that story really tell the tale of why proponents want to funnel more money into ethanol. Despite all of the government subsidies that the ethanol industry currently enjoys:

“Today there’s just one E85 station in California that is open to the public. It sits beside a highway interchange in San Diego. It was opened three years ago by Pearson Ford, a San Diego Ford dealer that was convinced alternative fuels would be the next big thing. The station offers gasoline and diesel, natural gas, propane, electricity, biodiesel and E85.

What it sells, though, is mostly gasoline and diesel. On a recent morning, it was offering E85 for $3.10 a gallon, about 6 percent less than the $3.30 per gallon it was charging for regular gasoline. But, because a gallon of E85 contains about 25 percent less energy than a gallon of gasoline, the E85 actually cost more per mile. Only a handful of cars pulled up to the E85 pump.

“I would like nothing better than to turn all my pumps over to alternative fuels,” says Mike Lewis, the station’s co-owner. “But I’m not willing to carry the alternative-fuel flag into bankruptcy.”

Promoting Hatred

This is where I have the biggest problem with the initiative. Proponents are using very inflammatory language to work voters up into a frenzy. This is nothing but demagoguery. In fact, Mr. Khosla wrote the following essay for The Huffington Post:

Big Oil’s Big Profits, and the Big Lies They’re Telling to Maintain Them

Of course the title is inflammatory enough, but the hypocrisy is what bothers me. Big oil is vilified for “big profits”, yet ethanol companies – which Mr. Khosla promotes - have far higher profit margins. An excerpt from the essay:

“It’s kind of like the tobacco companies that for years claimed that smoking doesn’t cause cancer. The oil interests are willing to publish any myth, and put any amount of money behind anyone who will support their untenable position.”

Following that essay, he wrote another:

The Big Oil Companies Have Been Ripping Californians Off — And Not Just at the Pump

Another inflammatory title, and more inflammatory rhetoric. Some excerpts:

“You thought you were being ripped off at the pump. You are, but that is only half of the story — the rip-off goes far beyond that.

As I blogged here previously, many of the big oil companies are raising prices at the pump while standing in the way of progress on immediately viable alternative fuels (while pretending through their vast network of slick lobbyists, consultants, ad agencies, PR firms and token investments, to be committed to alternative fuels) to lessen our oil dependence.

If the money and inside-Sacramento power of the big oil companies is going to allow them to rip Californians off, then certainly we Californians have the right, if not the duty, to join together and stand up for ourselves. But more on how they buy California (and National) politicians in a future blog (yes, post or email me your favorite big oil stories at vinod@yesoncleanenergy.com and I will feature them here).”

I honestly don’t believe there is any excuse for promoting this kind of animosity toward oil companies - even if you do stand to benefit financially from doing so. I am just waiting for the day that someone gets so wound up they decide to attack oil company employees on the way into work. It’s as if some people think that big oil companies are just a bunch of fat cats in an ivory tower plotting how to rip people off. In fact, oil companies are made of working men and women who sometimes give up their lives to make sure the gasoline keeps flowing. “Big Oil” is made up of the shareholders of oil companies, which span the gamut of backgrounds. So when hatred is spawned in the direction of “Big Oil”, these are the people who are the recipients of this hateful rhetoric. For the record, I have told Mr. Khosla that I disagree with these tactics. His response was “We will have to agree to disagree on this one.”

Conclusion

I don’t live in California, so I don’t have to vote on this initiative. There are some good aspects and some bad aspects, and forces on both sides are engaged in a pretty nasty campaign to win voters. The proponents needn’t worry. I think this initiative will comfortably pass because of the public animosity toward oil companies. I didn’t write this essay to influence undecided voters. I think the message of hope that Vinod Khosla is preaching is more readily accepted that anything the oil companies are saying. But my prediction is that after the tax is enacted, the gap between gas prices in California and the rest of the nation – already high – will increase a bit more. I am content with that outcome, but I have a feeling that a lot of Californians are going to feel like they have been ripped off.

Peak Oil and L.A.

I have visited 43 states, about 20 foreign countries, and 4 continents, but somehow never made it out to California. That changed last week when I had to take a business trip to L.A. I spent 5 days there, seeing some sights and taking care of business. I visited the La Brea Tar Pits, toured Hollywood, got harassed by the LAPD at Hollywood and Vine, spent a day at Universal Studios, checked out Venice Beach, and drove around the city quite a bit. The topics of Peak Oil and energy utilization were constantly on my mind, but what I saw there was mostly depressing.

The trip started out well. The man in the airplane seat next to me struck up a conversation. It turns out that he was a fraud investigator for a bank. He told some pretty interesting stories about bank fraud. But we eventually got into my line of work, and I brought up the topic of Peak Oil, as I am apt to do every chance I get.

I explained the dilemma to him. I told him that I don’t think we are at a peak yet, but that it is coming in the not too distant future. I told him that the situation we are in right now – with a supply/demand imbalance that may continue right up through the actual peak – should provide a preview of coming attractions (and keep upward pressure on prices). I explained the worst case scenarios, as well as how I think it is going to play out. And he “got it”, just like people almost always do when you talk to them one-on-one. If only we could talk to every person in the country one-on-one, we might start making some real progress.

Then he asked me a tough question that I always struggle with: “What should I do to prepare?” Now, this is something I think about every day. But the answer to the question is completely dependent upon how bad you think things will get. How much insurance do you need, and how much are you willing to pay for it? Each person must prepare according to their personal situation, but more importantly is how we prepare globally. After all, my preparations won’t amount to much if the country falls apart and descends into chaos.

I had a connecting flight in Salt Lake City, and we flew over the Great Salt Lake. I had flown over it before, but I had never noticed how much algae is in the lake. I started wondering about the prospects for a large-scale algal biodiesel operation there. From there, we flew over a lot of desert that appeared to be completely barren from the air. I wondered how much electricity we could produce from covering those barren areas with solar panels.

On the descent into L.A., I noticed two things. The first was the infamous L.A. traffic. I have lived in Houston before, and I have heard people say that Houston traffic is as bad or worse. Based on what I saw, it’s not. The other thing I noticed was that the air was brown. It would be several days before I figured out this was the reason my eyes were burning and itching during my entire trip.

Driving around Hollywood, I saw some reason for optimism. There were a lot of city buses operating, and a sign on the back of one indicated that L.A. has the largest natural gas fleet in the country. There were lots of people out walking (something you don’t see in Houston), even away from the major tourist attractions. At one point I saw a sign indicating the presence of a methanol pump, but I couldn’t figure out why they would be using methanol.

However, once I left Hollywood and got back on the freeway, my optimism faded. Not only was the traffic incredibly dense, but it was all moving at 80 miles an hour, and Hummers and SUVs were abundant. In fact, I have never seen so many Hummers in one day as I saw on my first day in L.A. I have often thought that Houston has to be one of the worst possible places to be post-peak. But L.A. may be even more car-dependent. I drove 30 miles north of L.A., and the traffic was still very heavy. I finally pulled off of the freeway, and just observed the traffic for a while. Fuel-efficient vehicles were greatly under-represented. Speed limits seemed to be optional. Conservation certainly did not appear to be embedded in the collective consciousness.

The other thing I noticed was that the area seems to be more litigation-happy than most. While I certainly understand the need for Lemon Laws, it is hard to believe that so many lemons are being sold to support as many lawyers as were advertising their services. But if you want to sue someone for selling you a bad car or because you think maybe at some point in your life you may have been exposed to asbestos, or you want to declare Chapter 11 bankruptcy with ease, it looked like I was in the right place.

I arrived at my hotel in Thousand Oaks, and asked at the front desk about restaurants within walking distance. They told me there was only 1, less than a block away. It later turned out that there were quite a few within a one-mile radius. But apparently, that’s not walking distance. I did walk to a restaurant about a half mile away at one point, and there were few pedestrians out. Just like Houston, it seemed that everyone drives everywhere. My first impression from Hollywood was that a lot of people traveled by foot. That’s not what I saw as I got away from Hollywood.

Before I left L.A., I did get to engage one more person on the subject of Peak Oil. Once again he quickly grasped the seriousness of the issue. I was pleased that I had brought the issue to the attention of another person. But all I had to do was look back at the freeway to realize that my efforts were like a single drop of rain in a downpour. Two people listened. Millions were still oblivious in this one city. Sometimes I feel so helpless. I want to affect change. I want to help point us in the right direction. So, I take little steps by writing as much as I can to educate people, and by talking to people one-on-one. Then I go to a city like L.A. and am frustrated that so many people are not getting the message. What can we do? How can we affect the behavior of the masses? And what are the consequences if we don’t?