The Fuse

Obama’s Energy Policy Frustrates All Sides

by Matt Piotrowski | August 24, 2015

The Obama administration is continuing to carve out a middle ground when it comes to energy policy—satisfying neither environmentalists nor the energy industry in the process. In August so far, he has found backing from environmentalists with the Clean Power Plan and new methane regulations on oil and gas production. In the meantime, Team Obama also approved crude oil swaps with Mexico and gave the green light for Royal Dutch Shell to drill in the Arctic, both of which were nods to the oil industry.

The Obama administration is continuing to carve out a middle ground when it comes to energy policy—satisfying neither environmentalists nor the energy industry in the process.

The recent activity is consistent with Obama’s “all-of-the-above” energy strategy, underscoring the president’s desire to achieve ambitious goals related to both economic growth and climate change. Despite failure on cap and trade, Obama has been a transformational president on energy security issues with numerous actions, including tightening automobile fuel efficiency standards, standardizing tax credits for hybrid and electric vehicles, taking mostly a hands-off approach on hydraulic fracturing, regulating methane in new oil and gas fields, showing flexibility with crude oil exports and the strategic petroleum reserve, putting off the Keystone XL pipeline decision, and granting approvals for drilling in the Arctic. In the power sector, his administration has encouraged alternative energy sources such as solar, cutting carbon emissions in power plants

But these actions, among others, have opened him up to numerous criticisms from all sides—often from the same interest groups that applaud many of the administration’s decisions. “The Obama administration has recognized it can be aggressive in both its environmental and economic goals,” said Josh Freed of Third Way. “But there’s been frustration from both the industry and environmentalists.”

Crude oil exports

The lifting of the virtual ban on crude exports, something producers have been advocating for, will not likely occur under the Obama administration. However, some recent concessions have been made to the oil industry. On August 14, the Bureau of Industry and Security (BIS), a division of the Department of Commerce, approved a one hundred thousand barrels per day swap with Mexico’s state-run Pemex. This action comes on top of last year’s announcement from the BIS that lease condensate that has been processed through a crude oil distillation tower is considered a petroleum product and can therefore be shipped overseas, helping producers alleviate the domestic glut of the ultra-light form of crude oil.

The exchange with Mexico provides another relief, albeit an extremely minor one, to the U.S. oil industry, which is drowning in a glut of light, sweet crude that has resulted from the rapid growth in shale output over the past five years. Pemex, for its part, will ship equal volumes of heavy crude to the U.S. for refining here. While the decision is beneficial to crude producers, it sparked no outrage from any interest group or the general public. Lifting the ban would, however, likely bring about a backlash from the refining industry and consumers concerned about gasoline prices.

Arctic drilling

The decision to allow Shell to drill in the Arctic was a different story. In another concession to the oil industry, the Obama administration gave Shell final approval to resume drilling into the oil zone off northern Alaska for the first time since 2012, despite the company suffering an accident there during that year.

This action, while not unprecedented given the administration’s previous support for Shell’s Arctic drilling program, infuriated the same environmental supporters that lauded other actions like the clean power rule. Drilling in the Arctic raises the specter of another Macondo-like oil spill in the area, the fallout of which would last for an even longer period of time, perhaps even decades, given the regional challenges in dealing with a clean-up. In a sign of how contentious the issue is, Democratic front-runner for president and Obama’s former secretary of state, Hillary Clinton, tweeted her disapproval of the decision: “The Arctic is a unique treasure. Given what we know, it’s not worth the risk of drilling.”

The administration’s approval has befuddled observers, who wonder why an expensive Arctic drilling program was approved at a time when global oil prices are at perilous lows thanks to global oversupply and U.S. oil production is at the highest point in decades.

Methane regulations

The administration’s plan to regulate methane emissions from oil and gas production, announced last week, is a true Obama-esque middle ground approach that has pleased and frustrated both environmentalists and the industry.

The administration’s plan to regulate methane emissions from oil and gas production, announced last week, is a true Obama-esque middle ground approach that has pleased and frustrated both environmentalists and the industry.

“The methane regulations are only for new development, not old wells, and they don’t deal with infrastructure, so they don’t go far enough,” said Hal Harvey, the CEO of Energy Innovation.

The fact that only new wells will be regulated by the Environmental Protection Agency (EPA) was a relief to the industry—even though marginal producers, most of whom are struggling in the current low-price environment, will take a big hit.

The environmental community may see the regulations as inadequate, but a step in the right direction. If more action is taken to reduce leaks of methane—which is 25 times more powerful than carbon dioxide in trapping heat—natural gas will be seen as a much more durable fuel for the longer term in the power sector and be embraced by environmentalists as an important contributor to the transportation in spurring both fuel diversity and reducing emissions.

“All fuels in the transportation sector have challenges, and none are by any means a miracle,” said Harvey. “Natural gas is definitely affordable, but faces a number of infrastructure, extraction and transmission issues—primary among them are direct CO2 emissions and natural gas leaks, which are powerful greenhouse gases.”

Clean Power Plan

Environmentalists cheered the new rule for power plants, released early August, while the coal industry said the regulation will put it out of business. The rule is the first-ever national standard on power plant greenhouse gas emissions, a seminal moment for climate action and the fossil fuel sector. The plan, which deals with both new and existing plants, will have far-reaching effects, but the full impact will not be known for years.

Coal will inevitably take a hit from the new regulations. However, it was already losing share in the U.S. electricity market, with natural gas overtaking it as the primary source for power generation earlier this year. Natural gas is cheap and abundant in the U.S. thanks to the fracking boom, and is seen as dominating electricity generation for decades to come. Moreover, the costs for alternative energy such as wind and solar have dropped significantly, making them more attractive for the power sector’s portfolio. The new rule will simply accelerate coal’s demise but not undermine overall economic growth given the supply diversity in the power sector and how affordable electricity currently is.

What next during rest of Obama’s presidency?

With his 17 months left in his presidency, what else can Obama do to cement his energy legacy? Much attention will be paid to the UN climate talks in Paris in December and how the president maneuvers between dealing with allies who want aggressive cuts in carbon emissions and a skeptical Republican Congress that is adversarial to his climate policy.

If his first 79 months in office are any guide, he will continue walk the fine line right down the middle—angering a lot of people along the way.

The climate change talks in Paris are the biggest energy and climate issue on the horizon, given the wide-reaching economic implications. There are also the number of ongoing domestic transportation, oil and gas, and climate issues that will fall on the president’s energy plate in his last year or so. If his first 79 months in office are any guide, he will continue walk the fine line right down the middle—angering a lot of people along the way.