TODAY’S STUDY: WHAT TEXAS SHOULDN'T DO FOR ENERGY

Few things are as instructive as a bad example. The report highlighted below, which describes Texas energy as if it was 1955, overlooks all of the state’s astonishing wind and solar assets and uses worst-case price data to emphasize the short-term affordability and familiarity of the state's fossil fuels. It also fails to explain that the fossil fuels' existing price advantages are the result of supporting subsidies and incentives long in place.

The archly reactionary report comes from researchers at the ExxonMobil-funded American Enterprise Institute. Texas planners would be creating a huge opportunity for New Energy developers in the other 49 states if they take this short-sighted advice and fail to provide support for Texas' nascent New Energy industries.

If Texas planners want an authoritative, forward-looking examination of what is possible, they can consult STUDY: ALL NEW ENERGY BY 2030 (Part 1) and STUDY: ALL NEW ENERGY BY 2030 (Part 2) below.

Texas Energy and the Energy of Texas; The Master Resource in the Most Dynamic Economy
Steven F. Hayward, Ph.D. & Kenneth P. Green, Ph.D., January 2011 (American Enterprise Institute via Texas Public Policy Foundation)

Summary: “If It Ain’t Broke, Don’t Fix It”

There are few current conditions in America to which this old folk axiom applies better than the Texas economy. The Texas economy is (or ought to be) the envy of the nation. The Texas economy has been notably outperforming the nation’s economy for at least a decade. Texas’ relative share of total national economic output has grown by a full percent over the last decade, and it has been racing ahead of the nation’s largest state, California, as shown in the table below. Although Texas has shared the nation’s economic pain during the current Great Recession, its economy continues to outperform the nation, with unemployment about 2 percent lower than the national average. Over half of the nation’s total net new private sector jobs between August 2009 and August 2010 were generated in Texas.

Two main macroeconomic factors explain this success:

- The first—sensible low taxes and moderate regulatory policy—are well known, and explain the dynamic entrepreneurial culture of the state. Texas has succeeded in avoiding the mistakes of Washington, D.C. and other states that have hampered economic growth with high taxes and cumbersome regulations. Few people in Texas are proposing to abandon this winning formula.

- The second factor is less fully appreciated: the role of energy in the Texas economy. Texas is the largest energy producing and consuming state in America; energy use is a central factor in the state’s prosperity. Understanding the details of this story is the focus of this study. Any proposal that may threaten to disrupt this side of Texas’ winning formula should be carefully avoided.

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- Just as the Midwest is regarded as the “breadbasket of America,” Texas should be regarded as the “energy breadbasket of America.”

- Texas accounts for more than half of the nation’s total domestic production of oil and natural gas. The long history of oil and gas in Texas is well-known, but that is far from the end of the story.

- Texas is also the leading coal-consuming state in the nation, using nearly twice as much coal to generate electricity as the second-place state (Indiana). Texas is also the eighth largest coal-mining state.

- While much of Texas’ oil and gas production is for export to other states, its coal production and consumption is the mainstay of its electricity production.

- Although Texas, like many other states, has more gas-fired electric generation capacity, it relies on its coal-fired power capacity for a larger share of its 24/7 baseload electricity needs. Texas, like most states, uses natural gas as a “swing” producer for peak periods of power demand because it is a higher cost source than coal. This contrast is evident in the above figures.

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- Coal is the cheapest source of Texas electricity after nuclear power (but nuclear power only supplies 10 percent of electricity in Texas—see above); suppressing coal-fired electricity will entail higher energy prices for Texas consumers.

- The Texas energy picture is changing rapidly and presenting new challenges for policymakers—chiefly the challenge of doing no harm to the sector.

- Texas natural gas production has soared with the development of new drilling technologies and the opening of “unconventional” gas fi elds in the state. New supply is putting downward pressure on natural gas prices—a blessing for consumers but a market risk for gas producers, who fear falling prices may render gas production less profitable.

- Market mandates on picking one fuel source are akin to sawing off one of the legs of the three-legged stool (oil-gas-coal) that comprises the Texas energy portfolio. This balanced portfolio has been critical to Texas’ success.

- Texas’ position as the highest energy consuming state in the nation needs to be better understood, not presumptively criticized. Energy consumption is controversial today: environmentalists especially mark out high energy consumption as a sign of inefficiency or profligacy.

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- Texas is in fact America’s largest industrial state, with a high concentration of energy-intense manufacturing industries, especially petrochemical refining. Texas uses more energy for industry than the next top three states combined (California, Louisiana, and Ohio). Nearly half of Texas’ total energy use is in its industrial sector. This is one-third higher than the national average. Higher energy prices will reduce the competitiveness and profitability of Texas’ manufacturing sector.

- The affordability of energy is a key component in the economic competitiveness of the state. The states that have attempted to intervene in energy markets are saddled with the nation’s highest energy prices.

- Texas’ strong position as a fossil fuel energy producing state is an asset rather than a liability, as it is better shielded from price and supply shocks.

- The Texas energy sector faces several key uncertainties from both federal regulatory initiatives and potential state regulation.

- Energy markets are volatile; price swings from national and global changes in supply and demand for different energy sources can have significant effects on the economy.

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Conclusions

- The best energy strategy is to develop energy resilience through a diversified energy portfolio that emphasizes abundance, aff ordability, and reliability.

- The best policy for achieving energy resilience is an open, adaptable marketplace for competing energy supplies and technologies, rather than mandates and patchwork subsidies that introduce artificial distortions and constraints in energy markets. The goal of policy should be to make the entire “energy pie” bigger, not to try to force favored parts of the energy pie to grow or shrink. Existing mandates should be reviewed for possible elimination.

- To adapt another popular slogan, the best advice for Texas policymakers can fit on a bumper sticker: “Don’t Mess with Texas Energy.” Texas should not do to the energy sector what it would not do to any other sector of its economy.

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Introduction: “Energy 101” Why Energy Literacy Is Necessary

Energy is rightly called “the master resource” because it makes possible nearly all forms of human activity and advancement, and drives the economy. We tend to take it for granted precisely because of its abundance, convenience, affordability, and reliability. Consumers whose primary interaction with energy is turning on a light switch or filling up an automobile fuel tank take its abundance, reliability, and aff ordability too much for granted. In fact, mass-scale energy is relatively recent aspect of human existence—really just the last 200 years, although energy has a long and important history. And it requires a sophisticated supply chain that cannot be replaced or supplanted on wishful thinking or through blunt force government mandates.

Energy Literacy: Basic Measurements and Their Meaning

Energy is not a unitary phenomenon; in other words, energy comes in many different forms and has many different purposes. It is common to lump the majority of our energy consumption under the banner of “fossil fuels” (oil, coal, and natural gas) versus “renewable” energy, but this is misleading.

The most basic distinctions to keep in mind are that energy is consumed in the form of combustion for transportation, in the form of electricity, and in the form of a feedstock for industrial production (such a natural gas and oil for plastics, chemicals, and pharmaceuticals). About two-thirds of total American energy is consumed in the form of electricity, and one-third for transportation, which depends overwhelmingly on liquid fuels refined overwhelmingly from oil. Very little oil is used to produce electricity (only about 1 percent nationally), which is why expanding wind and solar power, or swapping natural gas for coal-fi red electricity, do nothing to reduce America’s dependence on imported oil.

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Most people have a good grasp of one aspect of energy use—gasoline. Because we regularly buy gasoline at the pump, we have a good idea of the utility of gasoline (that is, the miles per gallon) as well as its price. The basic unit of energy analysis is the BTU—the “British Thermal Unit.” A BTU of energy, unlike a gallon of gasoline, is an utterly meaningless number to anyone except an energy engineer. It might as well be a Qautloo from Star Trek or measuring speed in furlongs per fortnight. But energy analysis requires a common unit of measurement, and if we did not use the BTU, we would use a similarly opaque composite unit. (In fact, the alternative unit of energy measurement is the Joule, an even more unwieldy unit that measures energy in terms of force necessary to move 1 kilogram a distance of one meter.)

A BTU is the amount of energy required to heat a pound of water by 1 degree Fahrenheit. What does this mean in practical terms? Consider a common cup of tea, which is about 8 ounces of water. It requires 75 BTUs to heat a cup of water from average room temperature to boiling. In the standard microwave oven, it requires about 22 watts of electricity to boil a cup of water; in other words, about as much electricity as a 75 watt lightbulb uses in 18 minutes.

To put this in perspective, Texas consumed 11.5 “quads” of BTUs (or quadrillion BTUs) in 2008. (More on how this energy use breaks down in the next section.) Th is is enough energy to boil over 9.6 trillion gallons of water, or about 14,600 Olympic size swimming pools.

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One gallon of gasoline contains 124,238 BTUs of energy—enough to boil 1,656 cups of tea. To put this in alternative terms, a sedan that gets 20 miles per gallon of gasoline requires 6,212 BTUs to travel one mile, or the equivalent energy of 83 cups of tea.

This comparison helps explain why gasoline is such a useful fuel, and why attempts to replace it are so diffi cult. Gasoline has 1000 times as much energy as the same weight of fl ashlight batteries, and 100 times as much energy as an equal weight of lithium-ion batteries such as are found in today’s computers and cell phones. Th is disparity between conventional fossil fuels and other energy sources explains why fossil fuels dominate the world’s energy marketplace and will continue to do so for decades to come.

The key concept that emerges here is energy density—that is, the energy content of various sources. A lump of coal, a cubic foot of natural gas, a gallon of oil (and an ounce of uranium fuel for that matter) contain more energy by orders of magnitude over diff use “renewable” sources such as wind, solar, and biofuels. According to Prof. Nate Lewis of CalTech, all of the batteries ever made in history would only power the world for about 10 minutes.

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It is hard to overstate the role of energy as the “master resource” or cornerstone of the entire modern economy. With out aff ordable, abundant energy, most commercial industry would become uneconomic or cease altogether. Consider that a gallon of gasoline, which is produced from oil extracted from the ground, transported to be refined, and transported again for consumer use, is delivered for a price less than bottled water. This does not happen spontaneously. Yet it is precisely the high energy density and sophisticated organization of conventional fossil fuel sources, largely unseen by most consumers and unappreciated by policymakers, that have lulled us into complacency or superficial thinking that our energy marketplace can be rearranged through government diktat.

We have forgotten the lessons of the 1970s, where many aspects of the “energy crisis” of that time was the result of outmoded or ill-considered state and federal regulation of the energy marketplace. Th e de-regulation of energy from the 1970s, starting with oil, gas, pipelines, and railroads to enable more interstate transport and competition, and going through electricity de-regulation in the 1990s, played a large role in the economic growth of the nation during the last generation.

The following sections of this report will explore some of the details of energy production and use in Texas, a state that is unique among the states in both respects. It is hard to overstate the centrality of the place of energy in the Texas economy and therefore impossible to exaggerate the importance of policymakers proceeding with considerate wisdom in making new decisions affecting the sector…

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Energy Production in Texas

Texas is the leading energy producing state in the nation. This has a major macroeconomic benefit to Texas that nonenergy producing states do not have. The primary benefit is that energy-producing states are less likely to suffer economic damage from energy price shocks. The logic is relatively straightforward for this dynamic: when world prices for oil go up, revenues for energy producing states go up with it. And to the extent that residents of energy producing states hold energy stocks, their investment and retirement portfolios improve. Mark Wiedenmier of Claremont McKenna College and the National Bureau of Economic Research explored the relationship between consumption and gross state product for all 50 states from 1963 to 2007, and concluded:

The results show that an increase in oil prices reduces economic activity in non-energy states, but not in states where energy production constitutes more than 5 percent of gross state product. Oil shocks increase unemployment and reduce the number of jobs in nonenergy-producing states, but they do not have a signifycant impact on unemployment or employment in energy-producing states. In some cases, an increase in oil prices actually reduces unemployment and creates jobs in states with a signifi cant energy sector. Overall, the analysis shows that increasing domestic fossil-fuel production could potentially reduce unemployment, create jobs, and help jump-start the U.S. economy out of the Great Recession…

Oil and gas extraction in Texas account for 52 percent of the nation’s total GDP in that sector. Oil and gas extraction account for 8.2 percent of Texas’ total economic output, compared to 1.3 percent for the nation as a whole, and 0.7 percent in California. As shown in Figure 1, natural gas—not oil—accounts for the largest share of energy resources produced in Texas: 68 percent on a BTU basis. Much of this gas production is for export to other states, however.

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Conclusions

Energy is an enormously complicated subject susceptible to multiple levels of analysis, and even more levels of confusion and misrepresentation. Some key points that emerge from the preceding analysis bear reiterating:

- The affordability of energy is a key component in the economic competitiveness of Texas. States that have attempted to intervene in energy markets are saddled with the nation’s highest energy prices, and fi nd key industries (i.e., aviation and auto manufacturing in California) are no longer competitive.

- Energy markets are volatile; price swings from national and global changes in supply and demand for different energy sources can have signifi cant effects on the economy. Policies that constrict the energy market—or tilt it to favored energy sources—will reduce the resiliency of the energy sector and risk higher prices for consumers and industry.

- Texas’ strong position as a fossil fuel energy producing state is an asset rather than a liability, as it is better shielded from price and supply shocks.

- The Texas energy sector faces several key uncertainties from both federal regulatory initiatives and potential state regulation. Uncertainty is the enemy of future planning for capital investment.

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It is remarkable that so many people have forgotten the lessons of the 1970s, where much of the disruptions, scarcities, and price volatility of the “energy crisis” was the result of obsolete or ill-considered federal and state regulation.

Leaders of both parties, on both the state and federal level, began de-regulating markets—first for oil and natural gas, later for transportation infrastructure such as pipelines and railroads, and finally with electricity—that enabled the U.S. to end that period of energy volatility. To paraphrase the old cliché, those who forget the lessons of policy history are doomed to repeat them.

- The best energy strategy is to enhance energy resilience through a diversified energy portfolio that emphasizes abundance, affordability, and reliability.

- The best policy for achieving energy resilience is an open, adaptable marketplace for competing energy supplies and technologies, rather than mandates and patchwork subsidies that introduce artificial distortions and constraints in energy markets. The goal of policy should be to make the entire “energy pie” bigger, not to try to force favored parts of the energy pie to grow or shrink. Existing mandates (such as “renewable portfolio standard”) should be reviewed for possible elimination.

- To adapt another popular slogan, the best advice for Texas policymakers can fit on a bumper sticker: “Don’t Mess with Texas Energy.” Texas should not do to the energy sector what it would not do to any other sector of its economy. Tilting the marketplace almost always leads to bad outcomes; in the energy sector, adopting policies favoring some sources over others will reduce the reliability and resilience of the energy market.