President Obama’s remarks at Georgetown make certain tax reforms essential for achievement of his goals.  In his remarks, Mr. Obama highlighted the role that technology plays in our energy future.  New technology has yielded the drilling advances and extraction capability linked with America’s growing supply of natural gas and oil.  Additional new energy technology will come not only through federal research grants but also from R&D done in the private sector. New taxes on the energy industry, in both the traditional oil & gas segment, as well as the renewable sector, will only take away money from areas that support R&D. Historically, the energy industry has sought out new and innovated technologies that increase energy capability and development which benefit everyone.

The President noted the benefits that the U.S. is receiving from the technological advances that have led to growth in the supply of natural gas.  Observing that there are criticisms of natural gas extraction, the President stated, “We should strengthen our position as the top natural gas producer because, in the medium term at least, it not only can provide safe, cheap power, but it can also help reduce our carbon emissions.”  The lower carbon intensity of natural gas is one of its considerable advantages (See Penley on Education and Energy – EPA Study Provides Favorable Findings for Natural Gas).

In addition to the role that new technology has played in unlocking the enormous U.S. supply of natural gas, technology is also making a considerable difference in other energy areas, e.g., efficiency of photovoltaic cells for the production of solar energy, oil sands technology and high efficiency carbon capture.  The latter area of technology development becomes especially important to mitigating climate change from atmospheric carbon in that fossil fuels, as Mr. Obama observed, will be around for many years to come.

Accomplishing the President’s goals, however, makes policy change essential. Among the most valuable policy changes for incenting new energy technology is tax reform associated with R&D tax credits for U.S. companies.  This type of reform was called for in a bipartisan report from the American Energy Innovation Council (AEIC): Catalyzing American Ingenuity: The Role of Government in Energy Innovation.  Without broadly drawn R&D tax credits that are generally applicable to the energy industry that do not have limitations to just the renewable energy sector, it is unlikely we will achieve the President’s goals.

The AEIC has linked a viable U.S. energy policy directly to the economic health of the country.  AEIC pointedly notes that underinvestment by the private sector in new R&D in energy limits U.S. economic health.  As the report detailed, U.S. underinvestment in energy R&D occurs as a result of the capital-intensive nature of the energy industry, the need for large up-front investments with slow turnover in capital assets, and the imperfect energy market leading to slow adoption of new technology.

R&D tax credits have historically been subject to repeated expiration with uncertainty about their renewal or the timetable for renewal.  That uncertainty limits the development of new technology in capital-intensive sectors like energy.  Moreover, R&D tax credits have been targeted at specific segments of the energy industry like wind and solar.  This practice of targeting specific segments of the industry limits the development of widespread new energy technology.  The consequence is that the historic underinvestment by the U.S. energy industry hampers the development of a broad range of new technology — from innovative sources of renewable energy to innovative technology for capture and sequestration of carbon to cheaper and more widely available sources of cleaner fossil fuels like natural gas.

The President’s remarks at Georgetown were about more than climate change; they addressed the need for policy that will advance the development of innovative energy technology.  They make the case for the President to address tax reform with specific attention to the issue of R&D tax credits that will encourage an industry that is critical to our economic health.

As predicted before, new evidence about energy production and consumption provides considerable insight into the development of market strategies.  The new report shows dramatic growth in the available supply of oil from the U.S. The 62^nd annual BP Statistical Review of World Energy reported that the U.S. was among the larger global producers of oil.  The U.S. led in growth of oil production with a 14% growth rate, year over year.  Saudi Arabia, still a world leader in oil production, grew at a 4% rate by comparison while U.S. production now represents about three-quarters of Saudi Arabia’s daily production.

The growth in U.S. production of oil is something that Penley on Education and Energy has previously noted as a likely outcome of technological improvements associated with oil extraction and the development of shale beds. Interestingly though the real news in the BP report is the increasing use of non-oil energy sources and the worldwide shift in demand for oil, once again signaling that that emerging markets will increasingly play an even greater role in the world market.  Bob Dudley, Executive for the BP Group and Thunderbird School of Global Management alumnus said:

For those of us in the energy industry, the challenges are about how we respond to the big shifts we are seeing – a shift in demand towards emerging economies and a shift in supply towards a greater diversity of energy sources, including unconventionals.

In developed countries like the U.S., oil consumption declined by 3%, despite the dramatic, forecasted increase in production.  The shift in increased consumption in emerging markets was evident once again in this data.   Although consumption increased by 5% in China, this was not record-setting for its rapidly growing economy.  Far more significant is the signal for growth in developing markets such as Africa where consumption was up 5% and in the Middle East were increases rose by 4.5%.

Differential changes to regional oil consumption continue to signal the global shift in economic opportunity from North America and Western Europe to regions of the world represented by emerging market economies such as Africa, Asia and Latin America. This serves as a reminder to businesses from all sectors, including education, that the prospects for the future lie in these emerging markets..

The BP Report also, as Mr. Dudley observed, a greater diversity in sources of energy and the continued potential that exists in non-traditional sources of energy for changes to labor markets and business opportunities.  Consumption of energy from renewable sources grew by double digits in many parts of the world, including developing countries.  In the U.S. and Europe (including Eurasia), consumption of renewable energy rose year-over-year by 12% and 15% respectively.  In emerging market regions like Latin America, the growth rate of consumption of renewables was even stronger at 20%.  Israel’s growth rate was a staggering 46%. Still accounting for just less than 5% of total energy consumption worldwide, renewables managed to reach a new record at this level.

Further evidence of the shift to more diverse sources of energy was the 2% increase in the production of natural gas.  The U.S. led the way in total volume change, but production grew in every global region except for Europe.   A surprising element of the data was the finding that trade in liquefied natural gas (LNG) declined.  This could have been the case for several reasons.  One possibility is the global growth in use of the new technologies associated with fracking, limiting the need for imports from other regions of the world.  A second possible reason is continued restrictions by some governments such as our own here in the U.S. on export permits of LNG.  A third is the simple matter of the increased costs associated with transportation.  The Center for Energy Economics at the University of Texas estimated that, at the low end, cost of terminals, liquefaction and transportation from Louisiana to Malaysia, for example, added $1.68 per million BTu.

The BP Report shows us that there is considerable change in the production and consumption of energy across the world..  Its implications are significant for our understanding of global economic development and for understanding the foundation for the development of global market strategies.  These changes also help to signal where labor markets are headed and offer insight to those of us in education about the likely areas where job growth will grow and ebb.  The study of energy consumption and reports like these show us not only where energy is going and how it’s moving but also where the next great opportunities lie.

The Small Business & Entrepreneurial Council’s new study is telling about the potential future for job growth.  Entitled, The Benefits of Natural Gas Production and Exports for U.S. Small Businesses, this study makes clear that natural gas has led to the expansion of small business in the US and to the creation of 146,000 jobs between 2005 and 2010 as total US jobs fell by 4.3 million over the same period.  As we approach more forums by the Senate Energy and Natural Resources Committee relative to liquid natural gas (LNG) exports, it is worth noting the jobs-related potential that can come from allowing new permits for LNG export.

The Council’s report not only identified the specifics of job growth, it attributed some of the job growth to small businesses. While total employers fell over the five-year period between 2005 and 2010 by 4.2% in the US, small businesses with less than 500 employees in sectors like oil and gas extraction grew by 3%.   In some other related sectors, growth percentages were higher in the face of a declining overall US economy.

The forums by the Senate Energy and Natural Resources Committee could make a difference in the potential for future job growth.  The US continues to have an enormous potential for the production of natural gas.  This huge reserve has meant that the US has very favorable prices for natural gas when compared with the rest of the world.  The Council’s study reports recent prices for natural gas in the US of $3 per million metric British thermal units of energy, compared with a price of $11 – 13 in Europe and $18 in Southeast Asia.  The price differential explains the potential for exports from the US to the rest of the world – and the potential for additional job growth from large and small US businesses.

Some business representatives, especially in the chemical industry, have argued against permitting additional LNG exports.  Their argument for industry protection is associated with their own interest in protection and in producing chemicals at relatively lower prices with cheap US natural gas.  This kind of argument for isolating an industry or a country from world markets is one we have seen for centuries.  Isolationism and industry protection have not generally proved good for a country’s economy.  Some historians have catalogued the decline of the Spanish economy centuries ago to its decision to isolate domestic markets.  More recent examples of attempts at isolation are evident in agriculture from both the US and the European Union.

Generally speaking, the economy is a global one, and attempts at isolation are suboptimal.  Isolation tends to raise prices for a country’s citizens and limit economic growth.  The consequences are slower growth or decline in new businesses and limitations on growth or declines in new jobs.  As the US economy remains fragile in its recovery from the recent recession, this is no time for the US Government to take actions, which will be harmful to US job growth.  And the argument is easily made that this is especially no time to stifle the potential in an industry like natural gas that has been nearly singular in its job growth in the face of overall decline in most other US industry sectors.

The annual EPA report on greenhouse gases – Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2011 – published this past month, is striking for its findings on both carbon and methane and the impact of natural gas on the environment.  Its findings include evidence that is favorable to natural gas relative to two very important greenhouse gases: carbon and methane.  The findings associated with methane are especially important because they will be surprising in light of recent media reports.  The EPA report shows a decline in methane, raising serious questions about the methodology and findings of recent studies of ambient methane release associated with natural gas extraction.

Natural gas is increasingly becoming the fuel of choice for electric power generation.  There are many reasons for this, but an important one has been the relatively lower production of atmospheric carbon from natural gas.  However, the rationale for the transition to natural gas in the power industry goes well beyond its comparative advantage in friendliness to the environment from lower release of carbon.  Since 2009, the price of natural gas has declined while that of coal has risen.  Contributing substantially to the increase in supply of natural gas and its lower price has been the extraction method known as fracking.  Hydraulic fracturing of shale – or fracking – involves fracturing layers of underground shale using high-pressure injection of liquids.  The newness of the process has raised a variety of environmental questions.

When examining the impact of natural gas on the environment, it is important to understand why it is considered a cleaner fuel source.  Natural gas is a lower carbon intense fuel.  It produces the same unit of heat or electricity with a 55% lower carbon content than some other fuels such as coal.  US greenhouse gas emissions declined from 2007 to 2011 as a result of “a decrease in coal consumption, with increased natural gas consumption and a significant increase in hydropower used.”

Nevertheless, the increasing use of the fracking process for extraction of natural gas from shale has been questioned for its environmental friendliness, particularly from the potential for increased methane production.  Among the questions has been a set dealing with the potential that the process has for producing unintended emissions of greenhouse gases that offset the advantage of the lower carbon intensity of natural gas.  Of particular attention has been the production of methane in what has been referred to as fugitive methane emissions.  Methane has more than 20 times the capacity of carbon for trapping heat in the atmosphere.  The Intergovernmental Panel on Climate Change reported that atmospheric methane has increased by 158% over the last 250 years.

The annual EPA report adds very important information about natural gas and fugitive methane emissions. While natural gas remains a large potential source of methane, emissions of methane have decreased since 1990.  This decrease occurred at the same time that the supply of natural gas has increased substantially, at the same time that the fracking process was introduced for extraction of natural gas, and, most importantly, at the same time use of natural gas has increased.  In examining specifically the issue of methane production from fracking, the EPA report compared current findings of its Inventory with its Greenhouse Gas Reporting Program (GHGRP).  There are unreconciled differences between these two reports.  Moreover, the GHRP data “show lower overall methane emissions from well completions with hydraulic fracturing and workovers with hydraulic fracturing (refracturing) than calculated in this inventory.”

Clearly more studies will examine the issues of methane production from the fracking process.  The EPA will also work to reconcile data from different methodologies for measuring greenhouse gases.  But overall data from this Inventory are simply inconsistent with what has been reported from some studies about the impact of fracking on methane production.