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January 25, 2012

The Energy State of the Union Annotated

President Obama recognized the importance of natural gas and the new, disruptive technologies which have made at least 100 years of this fuel available to us; that's the good news from the State of the Union Address. The bad news is that the President appears to have learned a lot of wrong lessons about the proper role of government in innovation and appears poised to take a lot of wrong-headed actions. Here's that section of the speech as reported in The New York Times with annotations by them (NYT) and by me (TE).

POTUS: And nowhere is the promise of innovation greater than in American-made energy. Over the last three years, we've opened millions of new acres for oil and gas exploration, and tonight, I'm directing my administration to open more than 75 percent of our potential offshore oil and gas resources. (Applause.)

NYT: An administration official declined to explain exactly what this potentially huge expansion of offshore activity meant, except to say that the Interior Department would be announcing new lease sales in the coming weeks. Those sales will not include areas the administration has already ruled off-limits, including most areas off Florida and along the Atlantic Coast, the official said, so it is not clear how the president reaches his target.

— John M. Broder, reporter

POTUS: Right now -- right now -- American oil production is the highest that it's been in eight years. That's right -- eight years. Not only that -- last year, we relied less on foreign oil than in any of the past 16 years. (Applause.)

TE: That is good news but obviously most of the increase in domestic production comes from actions taken before the present administration was in charge. Also a recession-related decrease in demand cut into imports. But still good news.

POTUS: But with only 2 percent of the world's oil reserves, oil isn't enough. This country needs an all-out, all-of-the-above strategy that develops every available source of American energy. (Applause.)

A strategy that's cleaner, cheaper, and full of new jobs. We have a supply of natural gas that can last America nearly 100 years. (Applause.)

And my administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. And I'm requiring all companies that drill for gas on public lands to disclose the chemicals they use. (Applause.)

TE: Amazing how he managed not to say the f-word, fracking or even the proper names for the innovations which are unlocking vast stores of both oil and natural gas, hydraulic fracturing and horizontal drilling. He did make a nod to opponents of hydraulic fracturing with the line about disclosure of the content of the fluids used in the process when drilling is done on public lands, actually good policy from my POV.

POTUS: Because America will develop this resource without putting the health and safety of our citizens at risk. The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don't have to choose between our environment and our economy. (Applause.)

TE: Applause! (Interestingly Boehner was applauding during this section the speech but Biden wasn't.)

POTUS: And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock –- reminding us that government support is critical in helping businesses get new energy ideas off the ground. (Applause.)

TE: Ahem. In 1865 Col. Edward A. L. Roberts received the first of his many patents for an exploding torpedo; it was used not for war but increasing production from hydrocarbon formations. He died a wealthy man. The co-inventors of modern fracking combined with horizontal drilling were Joseph Clark and Riley Farris. By vastly increasing the supply of natural gas, they have arguably done more for energy independence, energy abundance, and lower carbon emissions than all the well-intended grant-funded green efforts in the last twenty years. That being said, surely some aspects of government and university basic research must have helped: perhaps studies of geology, sound wave propagation, GPS technology, and many other things. The President is right that government has a role in funding basic research.

POTUS: Now, what's true for natural gas is just as true for clean energy. In three years, our partnership with the private sector has already positioned America to be the world's leading manufacturer of high-tech batteries. Because of federal investments, renewable energy use has nearly doubled, and thousands of Americans have jobs because of it.

TE: Whoops. Wrong conclusion. There were no government incentives for fracking as opposed to other means of gas production, no special tax credits for this technology, no mandates that we use fracked natural gas rather than alternatives, no tariffs to prevent us from buying foreign natural gas when it was cheaper, no DOE-led grant programs tucked into the stimulus bill for hydraulic drilling. The wealth of natural gas didn't come about because of "federal investments"; it is a result of plain old-fashioned marketplace economics. Growth in "renewable use", on the other hand, is only because of government programs, just as the President says; that's why much of it unsustainable and, as the President points out later in his speech, why the "green jobs" created will die back without further subsidies while the direct jobs in drilling for natural gas and building pipelines are here for a long time to come and the indirect jobs in American manufacturing enabled by cheap domestic energy are "sustainable" – as long as the savings are not eaten up by subsidies for energy sources which aren't ready for prime time.

POTUS: When Bryan Ritterby was laid off from his job making furniture, he said he worried that at 55, no one would give him a second chance. But he found work at Energetx, a wind turbine manufacturer in Michigan. Before the recession, the factory only made luxury yachts. Today, it's hiring workers like Bryan, who said, "I'm proud to be working in the industry of the future."

Our experience with shale gas, our experience with natural gas, shows us that the payoffs on these public investments don't always come right away. Some technologies don't pan out; some companies fail. But I will not walk away from the promise of clean energy. I will not walk away from workers like Bryan. (Applause.)

TE: Unfortunately Mr. Ritterby's new job may not last past the expiration of tax credits for wind turbines at the end of this year. Our experience with shale gas (fracked natural gas) shows us that effective technologies can be developed by the private sector with no help from the government other than possible funding of basic research. The example of a government program the President should examine is corny ethanol: that set of incentives, mandates, and protective tariffs has led to less fuel efficiency, higher prices not only for fuel but for food as well, and probably environmental damage. The private sector goes down many blind allies as well; but it can't double down and insist that we use more expensive products – at least not unless it can hire lobbyists to convince congresspeople that such laws are needed. Anyway, it was ethanol the government was "investing" in while the natural gas answer to environmental and economic problems was developed outside the Washington Beltway.

POTUS: I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here. We've subsidized oil companies for a century. That's long enough. (Applause.)

It's time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double-down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs. (Applause.)

TE: By all means take the" taxpayer giveaways" away from oil (and gas and nuclear and coal) companies. But giving them to new politically-connected industries is exactly the wrong thing to do. Yes, the government should support research into many energy sources including renewable ones. Once these sources become competitively viable – and some of them will, the winning technologies will be good for America and good for the world and its environment – just as natural gas is. Government doubles down when it makes a mistake (see ethanol above); private investors move on to the next new avenue until they find something that works. That's the lesson I wish the President had learned from our recent energy past.

Nevertheless, the President is absolutely right that the abundance of American natural gas is a very, very good thing.

Full disclosure: I have invested in line with my beliefs and will benefit as an investor if inexpensive, clean natural gas displaces oil.

Related posts:

Natural Gas Disrupts the Energy Industry

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

We Can End Energy Subsidies

Good News for the New Year




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