IR 892 Internship Report
The Political Economy of Petroleum: The Role of Government Policy
Joakim Hellberg
San Francisco State University
Spring 2013
Abstract
The scientific consensus view on the reality of anthropogenic climate change science has not been matched by political action. United Nations-led climate talks are not showing any signs of putting the world on a 2°C track and investments in global petroleum production are inconsistent with this ‘safe level’ of temperature increase. The United States has been called out as a spoiler of the climate talks and significant parts of new investments in new fossil fuel production is located in North America. This report places government policy at center stage to explain why the U.S. is not acting on climate change. It employs two theoretical models, or worldviews, to frame the ‘debate’ on climate change and facilitate understanding of the power dynamics that has led to a large and politically powerful oil and gas industry. Two petroleum billionaires, Charles and David Koch, are especially active in their attempts to shape the trajectory of government policy, directly and indirectly, and are therefore given special attention. The report points out three critical elements of the political economy of petroleum: 1) That the oil and gas industry has been profitable over time; 2) that government policy has been crucial to industry profits through direct and indirect policy measures and; 3) that the industry has been especially active in influencing government policy and regulation. It concludes that opposition to climate action is rooted in a mix if economic interests and deep ideological convictions about the role of government in the economy.
1 Introduction 1
1.1 The Issue: Climate Change 1
1.2 Climate Change and The United States 2
1.3 Summary 5
2 Theory and Methodology 6
2.1 Hypothesis 6
2.2 Research Questions 6
2.3 Theory 6
2.3.1 The Market Model World View 7
2.3.2 The Market Model Applied to American Politics 8
2.3.3 The Organizational Model 10
2.3.4 Juxtaposing Models 11
2.3.5 Coalitions of Organized Interest 12
2.4 Methodology 14
2.5 Summary 16
3 Case study 18
3.1 The Profitability of the Oil and Gas Industry 18
3.1.1 The Financial Performance of Major Oil and Gas Companies 18
3.1.2 The Income Base of Koch Industries 22
3.1.3 Summary 24
3.2 Government Policy, Active Direct Subsidies to Petroleum 24
3.3 Government Policy: Active Indirect Subsidies to Petroleum 33
3.4 Actions to Affect Government Policy 35
3.4.1 Direct Influence on Policy Making 35
3.4.2 Indirect Means of Affecting Government Policy 39
3.4.3 The Positions of Supermajor Sponsored Organizations 47
3.4.4 The Positions of Koch Sponsored Organizations 48
3.5 Summary 49
4 Conclusion 51
4.1 Discussion 51
4.1.1 Strategic Implications 51
1 Introduction
During the summer and fall of 2012, I have been engaged in the culminating experience at the International Forum on Globalization[1] (IFG), San Francisco, for my Master’s degree in International Relations. My work at IFG focused around the issue of climate change and the actors in the U.S. who are opposing policy measures aimed at reducing greenhouse gas emissions. In particular, this work centered on two multi-billionaires brothers: Charles and David Koch, and resulted in a report released at the UN climate change conference in Doha, Qatar. The report was aimed at stirring up a debate and draw attention to how extremely wealthy individuals wield disproportional influence over the course of U.S. environmental policy. This internship report provides a more theoretical and comprehensive account of U.S. environmental politics and places the work of the Forum in a broader context.
1.1 The Issue: Climate Change
Climate change is first and foremost a political problem. The scientific consensus on the human causes of a changing climate is well established but political solutions remain distant. The Intergovernmental Panel on Climate Change (IPCC) will begin presenting its fifth Assessment Report (AR5) in September of 2013, but a leaked draft has already given indications of sharper formulations regarding the human causes of climate change, leaving virtually no room for alternative explanations. The leaked report states:
"There is consistent evidence from observations of a net energy uptake of the earth system due to an imbalance in the energy budget. It is virtually certain that this is caused by human activities, primarily by the increase in CO2 concentrations. There is very high confidence that natural forcing contributes only a small fraction to this imbalance" (Hickman, 2012).
The statement is to be contrasted with the previous 2007 report:
“Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations” (Pachauri & Reisinger, 2007).
The terminology of estimates in the IPCC reports refers to a set standard of confidence intervals in which very likely refers to a probability of occurrence > 90% and virtually certain indicates a level of confidence > 99% (Pachauri & Reisinger, 2007).
Even devout skeptics are being converted. The Berkeley Earth Surface Temperature Project, led by former climate change skeptic Dr. Richard A. Muller and funded in part by the Charles G. Koch Foundation, confirmed increasing temperatures, debunked the solar variability theory, and could find no other explanation to global warming better than increasing levels of carbon dioxide in the atmosphere (Muller, 2012). For climate change skeptics this means that the minimal opening for reasonable doubt that existed is now closed.
Global business-oriented institutions have also recently published reports describing the impacts of a warming world and the implications of using remaining global fossil-fuel resources. The World Bank (WB) raised the alarm before last year’s climate change conference in Doha (COP 18), by drawing up a scenario with serious effects of a moderate 4-degree Celsius warming (World Bank, 2012). The International Energy Agency (IEA) came out at the same time with the conclusion that two-thirds of remaining fossil fuel resources need to stay in the ground for the planet to stay below 2°C warming (International Energy Agency, 2012, p. 3).
Yet, there has been a boom in U.S. oil production and investment worldwide, which may expand world oil production capacity significantly by 2020. The additional capacity would come not only from conventional, but also from more polluting unconventional sources such as Canadian tar sands and U.S. shale oils making up 28.3% of projected growth (Maugeri, 2012). Contrasting this growing supply scenario with the IEA’s 2 degree Celsius energy demand forecast, Oil Change International suggests that 79% of planned capacity is above the ‘safe’ 2 degree Celsius global temperature increase limit (Kretzmann, Stockman, & Turnbull, 2012). This calculation is consistent with a 2009 study estimating the warming effect of an additional 500 billion tons of carbon emissions, bringing the number of total anthropogenic emissions to 1 trillion tons, to 1.3-3.9 degrees Celsius (M. R. Allen et al., 2009, p. 1163).
The international negotiations on climate change are not showing any signs of putting the world on track towards avoiding a significant rise in global temperatures either. The U.S. is considered by many to be one of the largest stumbling blocks to progress on this issue due to the scale of the U.S. economy, the volume of its greenhouse gas emissions, and its power position in international politics. During the 17th Conference of the Parties (COP) in Durban, South Africa the U.S. was called out as a spoiler of progress in the negotiations a by a number of large environmental groups, activists and elected officials (Goldenberg, 2011). These accusations were expressed anew in late 2012 at COP 18 in Doha, Qatar where Special Envoy Todd Stern and Chief Negotiator Jonathan Pershing kept a low media profile (Goodman, 2012).
1.2 Climate Change and The United States
Given the major part the U.S. plays in global climate change due to its high emissions, no significant international effort to curb warming could be effective without American participation (Rabe, 2011, p. 495). For a long time the U.S. was a leader in domestic environmental legislation as well as in international environmental politics, but in the new millennium it has lost much of its momentum and fallen behind other states and the EU (Harris, 2009). This negative trend goes back as far as the 1970s and 1980s (Falkner, 2005; Kelemen & Vogel, 2009). As the second largest emitter of greenhouse gases (GHGs); with the highest per capita emissions of GHGs; and the largest economy in the world; the U.S. has the financial and technological capability to mitigate climate change. If it was to lead - it is likely that other countries would follow (Harris, 2009, p. 966).
Since many landmark environmental laws were passed in the 1970’s, U.S. environmental ambitions has come and gone with the shift of presidents. While the Reagan and GW Bush administrations were the greatest opponents of environmental legislation and international binging treaties, Clinton’s and Gore’s ambition to have the Kyoto protocol ratified in the Senate was stymied by the Byrd-Hagel Resolution (Harris 2009).
After Congress failed to ratify the Kyoto Protocol signed by the Clinton administration in 1998 and George W. Bush took office, climate policy in the U.S. shifted to the state level. During this period of state domination of climate policy, renewable portfolio standards and regional cap-and-trade programs were developed in the absence of federal leadership. Following the 2007 Supreme Court ruling in Massachusetts v. EPA, a ruling compelling federal regulation of greenhouse gases under the Clean Air Act (CAA), climate policy transitioned into a period of ‘contested federalism‘ where the executive branch took back the lead over states amid legal and congressional challenges (Rabe, 2011, pp. 499–501).
The CAA...“is arguably the most successful piece of environmental legislation ever drafted” (Environmental law and policy, 2010, p. 465). It is estimated that the first 20 years of the CAA produced $21.7 trillion in benefits over costs (US EPA office of Air and Radiation, n.d.) and that the 1990 CAA amendments will produce net benefits close to 2 trillion in 2020, as it already has accumulated over 1.2 trillion in benefits as of 2010 (US EPA office of Air and Radiation, 2011). In the above-mentioned ruling of Massachusetts v. EPA, the Supreme Court found that the EPA was bound by the CAA to regulate ...”any air pollutant...which may reasonably be anticipated to endanger public health and welfare”... (Plater et al., 2010, p.482.).
While subsequent EPA regulation under Obama has been challenged in courts, the Administration’s climate policies were backed by the D.C. Circuit Court of Appeals in its June 2012 ruling in the case of Coalition for Responsible Regulations v. EPA upholding all of the EPA’s new regulation on greenhouse gases and the legal authority of the Agency over the field (Martinson, 2012). Despite the victory in the D.C. Circuit there is no reason to believe that Congressional attempts to cripple the EPA in its greenhouse gas regulation attempts will cease as industry-sponsored Republicans continue to use tactics of climate change denial and arguments of job-loss and rising energy prices (O’Konski, 2012).
The Clean Air Act along with other environmental laws and their derivate regulations are under attack from all directions. The Obama Administration has been forced to slow down on the rolling out of new regulations, parking 25 of them in the review stage in 2012. Despite broad support for the EPA from the American people attacks on environmental laws in Congress continue (J. Allen & Martinson, 2012).
Perceptions among the American public concerning the threat to them selves, their families, and community from global warming have risen significantly since 2008 and a majority is convinced that global warming is human caused (Leiserowitz, Maibach, Roser-Renouf, Feinberg, & Howe, 2012). The public support for Environmental Protection Agency regulation of carbon dioxide is very strong with 77% of voters supporting stricter Clean Air Act limits. 64% also believes that Congress should not stop the EPA from regulating carbon dioxide and 69% prefer EPA scientists to set air pollution standards over Congress. On top of the high approval for EPA action, most voters believe that more jobs will be created as a result of updated CAA standards (Bocian, Baumann, McHenry, & Judy, 2011).
Obama has tried to re-build the battered regulatory apparatus of the state by appointing leaders loyal to the notion of scientific administration, proposals to increase agencies’ funding (including the EPA), and by shifting cost-benefit analysis away from the conservative cost-heavy bias (Judis, 2010). Obama’s initial action was seen in appointments of prominent names to lead the work on the environment, energy, and climate change, and initial policy changes (Bomberg & Super, 2009).
While Obama is pushing a top-down federal regulatory effort to reduce greenhouse gas emissions, some analysts see progress on climate change is to be seen as an entirely bottom-up process where policies are implemented on the federal level only after states have already taken equivalent action (c.f. Selin & VanDeveer, 2007). Due to the limited scope and uncertain future of federal regulation, it is likely that future climate-policy developments will be predominately state and regionally centered (Rabe 2011).
A plot of the participation trend of the U.S. in major environmental agreements[2] reveals a steadily declining ratification trend since the early 1990s. The divergence between signature and ratifications during the 1990s indicates the division between the Clinton/Gore administration and Congress. If a global treaty on climate change is assumed to be a necessary component of a slowdown of greenhouse gas emissions into our environment, and the U.S. would need to be a key party to such an agreement, this data on participation does not show a particularly promising trend.
FIGURE 1 U.S. participation in major environmental agreements
Data source: Mitchell, International Environmental Agreements Database Project, (Version 2012.1). n = 53
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1.3 Summary
The scientific consensus regarding anthropogenic climate change has long been settled. The vast majority of remaining fossil fuel resources need to be kept underground for global temperatures to stabilize on average somewhere around 2°C. The majority of the U.S. public has accepted that humans indeed are responsible for warming the planet. There is a federal legal and regulatory framework in place with the power to limit greenhouse gas emissions. The administrating agency, the EPA enjoys a high level of support and trust from the public to implement the law.