Obama was warned of alternative energy’s high costs & limited benefits

by Eric Shierman

In his book Confidence Men, Ron Suskind reveals that Obama’s economic advisers warned him that alternative energy would create few jobs, even with massive government support. As early as 2007, when the notion of a “green tech” sector was all the rage amongst Democratic primary voters, economists advising the Obama campaign tried to steer their candidate away from promising a “green New Deal” type public works program. At a campaign policy briefing on August 1, 2007, a political advisor was discussing how critical the housing market was for employment and advocated more government support for people to buy homes, but Obama, long a student of Austan Goolsbee, knew better. The candidate cut that political hack off by turning to his economic policy team:

“But aren’t we already seeing excess capacity in housing?” he asked. “Aren’t values starting to plateau?”

Then everyone at the table had something to say. Talk about housing values will do that. The presumption still existed that real estate prices were special, defying basic laws of economic gravity, but this view had begun to erode. Federal Reserve chairman Ben Bernanke had claimed a few weeks before that losses resulting from the subprime mortgage mess would not exceed $100 billion, about one-third the size of the 1990s savings-and-loan crisis, and spoke of how the Fed’s two-decade, liquidity-above-all policy would keep credit flowing and continue to buoy residential and commercial building.

Obama took a swig from his water bottle and sat up, ramrod straight. “Okay, in year two of my administration, when the housing bubble finally bursts, I come to you guys as my economic advisers and say, ‘What do we do!’ Well, what do we do?”

Feeling suddenly like advisers to the president, the group burst into a debate about where ten million low-to-moderately skilled male workers might go. Obama mentioned his energy policy, the current core of the domestic platform.

“Tops, we’d be producing just two million jobs, in all the areas: wind, solar, all renewable,” Goolsbee said. “And much of that will be offset by expected job losses in the oil sector, if we ever get that far.”

Notice that alternative energy cannot survive without destroying its more efficient fossil fuel competition. An alternative energy market requires the destruction of more jobs than it would create. So why did green energy dominate the 2009 stimulus bill? As Suskind’s and many other’s reporting has made clear, the political advisers always won. Obama has received sound economic advice; he just has not heeded it.

So how do you suppose it felt, for Goolsbee and the rest of Obama’s economic policy staff, listening to Obama’s speeches, written by the politicos to sell the opposite of what they knew to be true? Suskind reveals the discomfort anyone with a basic grounding in economics felt sitting through the political theater Obama’s administration dished out on January 8, 2010:

Flanked by Vice President Biden, Tim Geithner, and Steven Chu, the Nobel Prize-winning secretary of energy, the president stepped to the lectern in the East Room to say, portentously, that “building a robust clean energy sector is how we will create the jobs of the future.” He went on like that for a bit, as did other officials, talking about the makers of solar panels and wind turbines – 143 firms in all – and how they’d form foundations of job growth for the twenty-first century. It was a bookend to an event in late October where he announced the competition for the grants at a solar panel farm in Arcadia, Florida.

But building capacity for some far-off future was the last thing anyone wanted to hear about. During a brief press availability following his prepared remarks, Obama acknowledged the deflating jobs numbers. They “are a reminder that the road to recovery is never straight,” he said soberly. “We have to continue to explore every avenue to accelerate the return to hiring.”

Geithner, in his statement, pointed out that the subsidies were expected to draw a match of $5.5 billion in private-sector investments, for a total of $7.7 billion, and eventually create more than seventeen thousand jobs. But the fine points of the program indicated that only a third of it was slated to create jobs by the end of the year, which would bring the total to just shy of six thousand jobs in 2010.

Nearly two years before, Goolsbee had warned Obama, then an underdog candidate, that hiring from a clean-energy initiative would be modest while its costs would be high. But now the White House was offering official pronouncements and fanfare, presenting the president and his top officials, for only six thousand jobs? The economy had lost seven million jobs in the last two years of recession; economists agreed that unless it added a hundred thousand a month, the unemployment rate wouldn’t budge. In the scheme of things, the clean-energy grants – which some inside the White House were already dubbing the “science fair” – were a rounding error.

Much has been reported about the failure of Solyndra, Beacon Hill, and many other solar companies, but much of the reporting misses the significance of this failure. Even if these companies never went bankrupt, their entire existences depended on subsidies. As soon as our fiscal position prevents further taxpayer support, they all will fail.

The greatest form of subsidy comes on the demand side, by government financing of installation. From the feds to the cities, governments at all levels are facing pension liabilities and revenue shortfalls; they cannot continue making bad energy investments in the name of chimerical “green-collar” jobs. Here in Portland, TriMet is “investing” $370,600 in a solar facility that will save only $3,680 per year. Comparing these savings to the cost of the principal alone, this project offers less than a 1% rate of return. When taking into account the interest rate paid to borrow that money, the value of the prime downtown Portland real-estate it’s being built on, and the time-value of money, this facility will offer TriMet yet another negative rate of return to their portfolio of boondoggles that has put them in their present financial woe.

And yet, most of these projects are far worse. The 2009 stimulus bill gave $300,000 in grants to the Arlington County library system in Virginia to at best save $14,000 a year in electricity costs by installing solar panels that have a life span of no more than 10 years, so $300,000 is invested to save $140,000. Such irrationality is spun as investing by claiming this production is driving the cost of solar energy down.

When such claims are made, look at the details of the data. It will show how the price of purchasing solar panels has dropped. Who would not have expected that? If the government induces an overcapacity of any product, of course its price will drop, but the costs of production are increasing. That is to say, in the name of “sustainability” solar panel producers will require even more subsidies going forward to maintain the overcapacity that drives the market price of their product down. This was not change Obama’s economic advisers could believe in.

While folks in the beltway are burning money in the name of energy policy, real money is being made just to the west. In West Virginia, property owners have in the past occasionally been able to earn $50 per acre when pockets of easy to tap gas were found. Since the development of hydraulic fracturing, the previously not so easy shale gas can now be economically tapped in great volumes yielding property owners more than $3,000 an acre. The Marcellus shale formation stretches all the way to Ohio, and there are many more like it across both our continent and nearly all the others.

marcellus-shale-map

This is huge; this is historic, but in the United States where this technology was invented, for the most part, only private land is being utilized. Most of the gas lies under federally owned land, the procedures for which to apply for drilling shale gas remain intentionally difficult and often purposely unclear.

Many Department of Interior bureaucrats were no doubt shocked to hear the president suddenly speak so kindly of shale gas drilling in his State of the Union address. I watched Obama’s address with a room full of progressives that nearly spit out their sushi and threw it at the TV.  It was a nice set of lines in a speech that should have reflected sound energy policy put in place three years ago.

My progressive friends should not have been so surprised had they read the White House’s jobs report that was released a couple weeks before. Being in campaign mode for quite some time now, the White House has been regularly touting recent job growth with a regular report that has consistently shown nearly every job created under Obama’s watch has been in fossil fuel extraction or the people employed to sell things to the folks profiting off this boom. Alternative energy jobs have indeed been a rounding error, just as Austan Goolsbee had warned.

The jobs report released before the State of the Union tried to claim responsibility for the economic boom in oil and gas that the president and his supporters never wanted to exist in the first place. The extent to which this administration’s efforts have been to lay down obstacles at every opportunity to slow the growth of our oil and gas sector has been exposed in dramatic detail in a recently released documentary SpOILed. Now, trying to campaign on some good news, the Department of Labor’s statistics are so revealing that the White House jobs report’s attempt to celebrate what jobs growth we have has forced them to embrace the obvious when it reads like press release from Koch Industries:

The discovery of new natural gas reserves, such as the Marcellus Shale, and the development of hydraulic fracturing techniques to extract natural gas from these reserves has led to rapidly growing domestic production and relatively low domestic prices for households and downstream industrial users.

Well no kidding! This was the first favorable mention by the White House of one of the greatest economic windfalls to fall our way in years. For three years now the marching orders of this administration has been to stall, delay, and drag their feet. Now the White House takes credit for it.

Obama’s three year quixotic quest for green energy jobs would be comical had it not come at the expense of real energy jobs. DOE staffers have been burning the midnight oil to find worthy recipients of alternative energy subsidies, but have been unable to keep up with the labor-intensive regulatory approval process of so many promising oil and gas projects, forcing the postponement of opportunities that will pay for themselves.

The net benefit to our economy if that state of affairs were reversed would have been non-trivial. The forgone economic growth when America needed these jobs the most has been a national tragedy. The Obama administration thinks that “we need more time” is a legitimate excuse for delaying a no-brainer project like the Keystone pipeline. This only begs the question of why they did not make it a priority THREE YEARS AGO! By no-brainer, I mean no cost. It requires no subsidies, and its environmental impact is nil.

Keystone

There is no global warming argument to be made here, since Canada can simply ship this oil to China, thus much has been made about Nebraska’s aquifers. Such scraping off the bottom of the excuse barrel is so silly they make one wonder if in this symbolic fight against and oil project, its opponents even know what an aquifer is. Imagine if an aquifer meant that the entire state of Nebraska’s water was contained in a big lake. Oil pipes could safely go right over that lake, because oil and water do not mix. A spill would require a cleanup of the oil floating on top of the water, but there would never be any threat to the water supply itself. As it turns out an aquifer is water embedded in rock deep below the surface. A Keystone spill would merely require the cleanup of the dirt far above it. The affluent romantics who reject human industrial progress itself need to go back to the drawing board for a better red herring argument.

Only a small group of well-to-do voters dream of a pristine world unadulterated by the touch of man. Most voters respond to job creation. That is why the futile goal of investing in less efficient sources of energy had to be framed by lobbyists as “green jobs.” Now that the comparison of green energy jobs to real energy jobs has become so unfavorable, Obama’s stump speech has incorporated the new line that “America needs an all of the above energy strategy.” Think about that. When choosing between investments that pay off and investments that don’t, do we really need to choose all of the above?

While the Obama administration’s attitude toward the Keystone pipeline has been “we’ll get right on that” its attitude toward throwing more money at solar companies remains “What Solyndra scandal?” Without batting an eye, they recently forked-out $737 million to Tonopah Solar Energy for a project its supporters claim will hire 600 temporary construction workers and 45 permanent jobs. That’s nearly a billion dollars for only 45 permanent jobs! Compare that to the Keystone pipeline that will create 13,000 construction jobs and, by increasing the capacity of gulf coast petroleum processing, will yield 118,000 permanent jobs without costing the taxpayers a dime. It is rational to assume that both projects’ supporters exaggerate the job figures, but if we were to multiply Tonopah’s rosy scenario by ten and divide Keystone’s by the same amount, it still would not even come close. And unlike Tonopah, Keystone does not require a subsidy – just permission.

If you are only now realizing how little economic sense these alternative energy investments have made, then slap yourself on the forehead. Solyndra and Tonopah needed subsidies precisely because they do not make economic sense. When we compare Tonopah to its real competitor, natural gas, the economic numbers get even worse. Tonopah’s supporters tout a best-case-scenario where it will only cost $311.80 per megawatt hour to produce electricity while new natural gas plants are already producing at a cost of only $63.10. Hmm, now if only we had an abundant supply of natural gas right?

While Obama appointees at the DOE were busy trying to plan our energy economy, real energy plans were developed by real energy companies that make real profits embarking on a technological revolution the implications of which few people yet realize. In shale gas, it is becoming more and more obvious that we could be looking at a source of energy so plentiful, it might provide a cheap, efficient source of energy to power economic growth for more than a century. It must suck to be an investor in Tonopah energy! Unfortunately, we all are.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change, and also writes for the The Oregonian’s My Oregon blog.

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Posted by at 05:00 | Posted in Energy, President Obama | 9 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Bob Clark

    Extremely well put, Mr. Shierman.  I have traded electricity and natural gas for the government in my past, and have been around the energy industry for more than 30 years now.  But I have always tried to get the best deal available in the market place for the government, and felt guilty when monies got wasted.  I know how hard most taxpayers work for their incomes and the sacrifices they make paying taxes.

    I am glad Obama opened the possibility of going after shale natural gas more vigorously (altho he most often says one thing only to do the complete opposite).  There are environmental side effects to fracking shale for natural gas; but it is so pervasive a domestic resource, America’s engineering capabilities should do extremely well in limiting the environmental side effects.

    The negative image of fossil fuels is so abrasive particularly in Portland and Oregon.  Just this past week I heard advisors to Portland Public Schools talk about peak oil, and peak oil is not even disputed among these so called academic experts.  If they simply read Daniel Yergin’s book THE QUEST, they would soon realize that the theory of peak oil has come and gone several different times over the last 120 years; and that oil demand will probably go into to a natural decline caused by gains in efficiency and market based alternative solutions long before the world runs out of oil.  Also, oil goes through decade long price cycles throughout its history.

    One other myth is oil companies are heavily subsidized.  But the reality is oil companies are heavy net payer of taxes, rather than a net recipient of net federal dollars.  Just look at the income statements of the major oil companies and you’ll find oil companies are are paying something like ten billion dollars or more (if I recall correctly) in income taxes, not to mention royalties for production from federal lands.  I think I heard Obama’s people talking about $4 billion in subsidies to oil companies.  What’s worse is accelerated depreciation by oil companies is considered a subsidy eventhough other companies are granted similar depreciation advantages.  The one cash subsidy they do receive has been the ethanol blending credit, which is something pushed by government rather than oil companies per se.

    Despite Obama’s self imposed economic obstacles, there are real positive trends in U.S oil and natural gas.  U.S oil production is grinding higher, and natural gas production jumping higher.  And on the demand side, we are seeing oil consumption dropping 5 to 10% even with the modest economic growth of the past year.  I suspect the internet may be a key reason for recent declines as internet shopping and bill payment seem to have hit a critical mass, reducing car based trip errands.  Of course, the recent price increases are causing mileage improvements, too. Sadly, too, millions of people have dropped out of the workforce for lack of job opportunities, also reducing trips.

    Woo, probably too long winded here.

  • valley person

    ” Much has been reported about the failure of Solyndra, Beacon Hill, and
    many other solar companies, but much of the reporting misses the
    significance of this failure. Even if these companies never went
    bankrupt, their entire existences depended on subsidies.”

    As has the entire nuclear industry from day one to the present, but strangely, I never hear conservatives complain about this.

    • JoelinPDX

      That’s because you’re so busy whining that you couldn’t hear the Union Pacific come by.

      • valley person

         So you are saying conservatives have been complaining about subsidies for nuclear energy?

  • David Appell

    This article is undercounting the job losses with alternative fuels — they woudl cause loses to doctors and hospitals in business too. Health damage from fossil fuels add at least $120 B/yr (National Academy of Science, 2009 report) and cause and 20,000 premature deaths/yr. That means more jobs for funeral directors, flower shops, airllines to fly in long-distant relatives…. That’s 0.8% of GDP, so alternative fuels could cause that relatively large economic loss. 

    In fact, if we burned even more coal and other fossil fuels we could probably stimulate theses important economic sectors even more — more nursing jobs, more hospital construction, more insurance industry profits. Has Eric Shierman run these numbers…?

    • valley person

       And don’t forget all the jobs managing refugee camps for Bangladeshees and the massive construction effort needed to move people inland from the east and gulf coasts. 

  • JoelinPDX

    Obozo was courting support from the greenies…and he got it. Solyndra is just the tip of the iceberg. You know, you have to pay for that support. But who cares? It’s only taxpayer money.

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