The Wall Street Journal last week highlighted the growing role that water shortages are playing in the decision about building power plants. A lack of water in 2001 reduced energy in Brazil, which relies on hyrdopower, questioning its reliance on water for such a high proportion of its energy needs. But its not just dams. Water is necessary to generate power coal and nuclear facilities. In the US, water use will become ever more contentious, especially as the west has turned more arid.

The UK government’s chief scientist last week predicted that water use will increase by 30% and energy by 50% by 2030. Although his predictions are for global resources, the increasing demand for resources he discusses will add to the tensions over scarce resources to come in the US, and will make the citing of power facilities even more complicated.

A shortage of water could reduce economic activity in a number of areas. Reuters puts together a short synopsis.

In a rare admission of China’s strategic petroleum reserve capacity, a senior industry executive acknowledged that all four state-owned emergency oil reserve tanks – holding a total 100 million barrels – are filled to the brim.

Revealing that China’s current stockpiles have already exceeded the capacity of the first phase of facilities, which the government built over the last two years, China Shipping Group President Li Shaode urged the government to use foreign exchange reserves to finance floating storage capacity in the short term.

Li’s comments come after a string of recent oil- and gas-related events in China. Within the last few months, China has entered into natural gas supply agreements with Myanmar, Kazakhstan and Turkmenistan, and has already begun construction on needed pipelines. In the last month, China has taken advantage slumped global demand as an opportunity to stock up on oil, and other commodities, at low prices.

…..click here to read more

Over the next year, the Obama Administration and Congress will debate how to address a wide variety of energy tax and fee issues. This comes on the heels of last year’s high oil and gas prices and record profits for companies in the industry which had Congress deliberating windfall taxes and more drastic action. Now that prices have dropped (at least for the moment), a more nuanced energy policy debate seems to be underway.

The Administration has begun the debate by outlining a plan in its budget that would amend taxes on the oil and gas industry. However, the Administration appears willing to negotiate with Congress on some of the details, which will eventually have to balance incentives, taxes, fees and access to resources. Even though the legislation will affect tax revenue and domestic energy production levels years into the future, it will be a product of oil prices and domestic economic activity when the legislation is passed. After all, Congress will not push a windfall tax when corporate profits aren’t at their peak or raise fuel taxes in a recession, regardless of the long-term implications.

What is needed is foresight. The President once commented:

I will tell you with $55 oil, we don’t need incentives to oil and gas companies to explore. There’s plenty of incentive. What we need is to put a strategy in place that will help this country over time become less dependent. It’s really important. It’s an important part of our economic security and it’s an important part of our national security.

When President George W. Bush said this in April 2005 he could have added that a strategy is an important part of environmental and fiscal policy, too.

Times have changed since then. Fluctuations in the price of oil have tested our wallets, but they have not changed our relationship with the commodity. Moreover, they have highlighted our need for a long-term strategy.

The New York Times published an article highlighting the schism in the environmental movement between those who choose to fight development of alternative energy programs which may cause some environmental harm and others willing to cede some ground for progress in broader environmental goals. For example, strict environmentalists are fighting against the development of wind power off the coast of Massachusetts as it might alter marine life and kill birds. Other moderate environmentalists, however, believe a few birds and some marine life may have to be lost to make progress on reduction of greenhouse gases, which they feel pose greater concerns.

The more moderate, nuanced approach to the environment will likely find a wider ear in Washington, as an all or nothing tack will not work in a country trying to find cleaner ways to power its needs domestically.

The New York Times published an article on the falling price of domestic natural gas, which, in part, it attributes to an increase in imported liquefied natural gas (LNG). A lower price of natural gas may spur additional use of it in the transportation sector, reducing net CO2 emissions — a positive development not just for the environment, but for energy security as it reduces our reliance on oil for transport.

However, unlike small eastern European nations that have access to cheaper natural gas and made more use of it for transportation, a supportive infrastructure of fueling stations will be more expensive to develop over the vast expanses of the US.

Today the Secretary of the Interior Ken Salazar spoke to oil executives and stated:

Just as your shareholders expect you to get a fair rate of return on your investments and to be wise stewards of your balance sheets, the American people are asking the same of us as we manage their resources

Bravo, Ken. I haven’t heard those words from a senior Interior Department official since Bruce Babbitt over eight years ago.

The goal of the Interior Department has always been two-fold: to promote responsible use of America’s resources, and realize fair value for the American taxpayer. But somehow the Bush Interior Department (enabled by legislation passed by a Republican-held Congress) focused almost exclusively on getting the minerals out of the ground without regard to revenue collection. The billions tucked underneath America’s soils and seabed in the form of oil and gas were seen as free money. This cash should go to the Treasury but often was given away to pet projects or foregone through royalty incentives. (Incentives have their place, especially to encourage companies to make risky investments, but I will address them at a later date)

Let’s take offshore drilling. All oil and gas in federal waters off the shores of the US are the property of the US. The government makes a deal with oil companies: they take roughly 88% of all the proceeds from the sale of the taxpayer’s oil they discover offshore and give the rest to the treasury. It works out well; the US provides stability through an open and fair bidding process and clear regulations to oil companies, and the firms, in turn, make large, often risky investments to help us get our minerals out of the ground. Compared to other countries, it is a model system.

But Salazar is right, from a fiscal perspective, it is important for the US government to review the royalties it charges, not just for oil and gas, but for all its resources. And it is a welcome change.

The Minerals Management Service (part of the Department of the Interior) and the Federal Energy Regulatory Commission announced they they will work together in regulating offshore alternative energy activities. This is a necessary but belated step. What’s worrisome is a nascent turf battle between the two agencies, especially at offshore sites that interest more than one type of energy developer.

Let’s hope the Memorandum of Understanding (MOU) does not split responsibilities a la the FDA and USDA food inspection regimes where, for example, at a frozen pizza facility, the USDA would be responsible for inspecting the pepperoni pizza process and the FDA, cheese pizza making.

The Minerals Management Service will have enough on its plate deciding how to adequately receive fair value for the American citizen when leasing federal sites on the Outer Continental Shelf without a turf battle over regulating as well. Maybe what is needed, instead of an MOU is a legislative fix.

Over the weekend OPEC members decided not to cut oil production levels. Instead, they chose to focus on doing what cartels are supposed to do: join together to regulate output.

OPEC announced yesterday that member states would restrict oil production to their allotted amounts “to contribute to market stability” as members have yet to completely comply with its total stated output cuts of 4.2 million barrels a day since last September.

There are a number of reasons it decided to maintain quota levels, despite calls by several nations before the talks to cut output. OPEC:

• wanted to ensure G-20 leaders, who meet early next month, would not lambaste the organization (and in person for the Saudis which are G-20 members) for adding to economic malaise by raising the price of oil.
• thought that an output cut could raise prices blunting demand and ultimately undermining efforts to increase revenue.
• felt that previous efforts had begun to succeed in stabilizing markets and that pricing was such that demand may be rising. (Click here for an excellent explanation on the forward curve and pricing.)
• needed to compromise internally. Nations with budgets that are heavily reliant on oil proceeds were pushing for a reduction. Adhering to quotas should reduce output by 800,000 bpd if countries actually didn’t cheat. (Good luck getting Iran, Venezuela and Angola to rein in production).

Another note of interest. Russia’s hard-line Deputy Prime Minister Igor Sechin attended as an observer and stated that his country supports OPEC’s decisions. He added that his country had reduced production by 1.9% over the year ending in January, as if the country’s policies of intimidating foreign investors, heavily taxing the oil industry and investing in the nationalization of resources rather than in production were all in support of cutting output.

Sechin also announced that the country was delaying issuing licenses for fields in the arctic, which will do little to affect current prices. In addition he stated, Russia would withhold oil from the world market and distribute it to farmers, as if he sought international credit for populist and essentially domestic policies. But Sechin didn’t receive all the accolades he sought. According to the WSJ Environmental Blog, some OPEC officials countered that Sechin’s claims of supporting OPEC are dubious as independent data shows Russian production recently increased by up to 700,000 barrels a day.