Dr. Michael E. Canes is Vice President of Statistics, Analysis and Information Systems at the American Petroleum Institute (API), the trade Association of the U.S. petroleum industry. He holds a Ph.D. in economics from the University of California at Los Angeles, an M.S. degree from the London School of Economics and an M.B.A. from the University of Chicago. His technical publications and articles have appeared in the American Economic Review, the Middle East Review and many other journals.
Multinational Monitor: What do you believe is the connection between burning fossil fuels and the greenhouse effect?
Michael Canes: Different fossil fuels have different impacts on global warming. The main fuels produced by our industry, oil and gas, fall somewhere in the middle to the lower end of fossil fuel impacts, relative to coal. And our belief is that natural gas, at least as it is utilized in the United States, would probably be better than some other alternatives.
Our general position on global warming is that there is a lot left to be done to try to understand what is happening and what likely will happen, that the models that have been constructed are not complete.
We support basically the policies that the United States has been following of doing a lot of things that are economically sensible that will help [offset] global warming, but not just because of global warming.
MM: How do you think the U.S. government should respond to the greenhouse problem?
Canes: Our industry would say put a lot of money into finding out a lot more about this. Obviously the potential impacts here are very great, but the vacuums in knowledge are also very great. It is not correct to say that we know already what is going to happen. We must act to get information quickly. We may one day have to take a lot of actions here, if the research indicates such actions are warranted. But we are not persuaded of that, because the models that are relied on to forecast global warming in the next century have proven to be inaccurate in predicting what has happened to date. And that shakes one's confidence that we really have much understanding now. You know, there are things like cloud cover and the effects of the oceans that must be accounted for, and then there is the actual temperature change over the past century or so relative to what the climate models would predict. These are not things that I am an expert on, but I understand enough about them to know that the theory is incomplete and predictions to date quite inaccurate.
MM: What level of certainty do you think needs to be achieved before major programs to limit emissions are undertaken?
Canes: It is a question of how much action to take. As I said, we agree with U.S. policy: let's do the things that reduce greenhouse gases that are sensible to do anyway.
Along those lines, steps should be taken not just in the United States, but in other countries as well. Eastern European countries have been burning soft brown coal for years, pretty much without restraint. There may be much more efficient ways to deliver energy services in some of those countries and at the same time to curtail emissions.
In terms of taking very active measures in the United States, such as large carbon taxes and things like that, the experience from the last 20 years or so teaches us that that would be very costly.
We have examined data from this period on what happens when effectively you are forced to use less energy by much higher prices. That is, higher prices for energy have induced less energy use, particularly in the early 1980s and late 1970s. We have looked at the growth rates of the U.S., Western European and Japanese economies to see what impact those energy price increases had on growth rates. The fact of the matter is that the U.S. growth rate from 1973 to 1986 declined by something like seven-tenths of a percent per year from the growth rate over the previous 13 years. Growth went from just over 3 percent a year in the United States to about 2.5 percent a year. Similar phenomena occurred in Europe and in Japan. The growth rate slowed in every country after energy prices rose. It is not all due to that one factor, but nevertheless, it was an important contributor.
So, putting a higher price on carbon, which means putting a higher price on energy, likely will have some impact on economic growth. Therefore, you want to be quite sure that you know the extent of the problem before you take measures like that.
MM: The criterion "be sure you know the extent of the problem" is a very difficult one to pin down. What level of certainty do you think it would take to justify dramatic action?
Canes: Well, perhaps that is a matter of judgment that individuals might differ on, but it would seem that you would want the climate models to be able to predict much better than they have to date. Again, the models and predictions they have made up to date have been basically falsified by the evidence of the past 50 years. The patterns do not accord with what those models have predicted. So one would like to see a little more confidence that our understanding, as reflected in the way we construct these models, can account for what is being observed. And of course I mean more than just saying emissions are occurring and therefore there will be heating, which is largely what the predictions have been. So far, that does not accord well with what has been happening.
MM: There is an emerging consensus among climatologists that global warming is likely to occur, or is occurring. Given the severity of the consequences, doesn't it make sense to take steps now, rather than to wait, when it might be too late?
Canes: Is it really true that climatologists have generally reached a consensus on this? I have read a fair amount of commentary on this, and it turns out there are significant numbers of physicists and other people who have knowledge in this area who basically say what I am saying: that is, we don't have very much knowledge yet about this. They may differ in their judgments about whether we ought to be more prudent or less prudent. Sometimes it comes down to their estimates of the costs of actions. But I would assert that most climatologists would say there is very significant uncertainty here. Very few would say we know, with a great deal of confidence, what is going to happen.
MM: But even with a level of uncertainty, given the growing belief that global warming is likely to happen and the massive consequences if it does, doesn't it make sense to err on the side of caution? The ozone situation seems to offer a useful parallel. For many years, industry said there was not sufficient evidence to act on the ozone depletion problem. Now we are going to feel the consequences for not having acted earlier.
Canes: It is not the industry so much that is saying there is uncertainty [about global warming] - industry spokesmen may say that, but they are not the ones who are studying this question. They are basically citing the work of other people, including academics, government scientists and others in the scientific world.
MM: What steps do you think are appropriate, by the government or the private sector, to improve energy efficiency?
Canes: Many of our companies have subscribed to the Environmental Protection Agency's Green Lights program, in which they are trying to find more efficient ways to light their facilities. There have been attempts in refineries to become more energy efficient. A lot of this was induced by higher prices back in the 1970s; over a period of 15 or 16 years, we measured an improvement of close to 30 percent in energy per unit of output. So actions have been taken and are being undertaken.
Many of our companies feel that government programs to expedite the turnover of the automobile fleet would help energy efficiency in the transportation area, since older cars are less fuel efficient.
MM: Does API have a position on automobile fuel efficiency (CAFE) standards?
Canes: The position of the Institute has been that we are open on the question, but we would not accept a diminution of safety.
MM: How important is opening of the Alaska National Wildlife Refuge (ANWR) to the oil industry?
Canes: It is enormously important. From our perspective, there are enormous gains this country can make through opening ANWR if in fact oil is found there. These gains range from an impetus to national growth to jobs that would be created in Alaska and elsewhere to energy security benefits to positive effects on the U.S. balance of trade. The prospective magnitude of such gains compares favorably with those from Prudhoe Bay. We believe the magnitude of these gains is overwhelming relative to the environmental impact we are likely to have in ANWR.
With regard to such impacts, first of all, we would defend our record in Prudhoe Bay. Second, oil drilling technology has advanced from the early days at Prudhoe Bay. We now use a much smaller area to drill for and extract oil. So we think the environmental impact in ANWR would be small. For that reason, our view is that it is extremely important that the public be persuaded that ANWR should be opened. If we are unable to seek new oil supplies there, where in our view the potential gains are extremely large relative to the potential costs, it is going to be very difficult to open up any new area.
MM: Many Alaskan indigenous people have expressed opposition to the development of ANWR, which they say could devastate their way of living. How does the oil industry stand on this issue?
Canes: I am not expert on all the feelings of the Native peoples of Alaska, but my understanding is that there is something of a split there. Some of the Natives have supported the opening of ANWR and a particular group, the Gwich'in, have opposed it. But, during the debate over ANWR, a memo came to light that had been produced within the Gwich'in community that said they were willing to lease their own lands for oil exploration at an earlier date, but that they had not been able to find a taker. This certainly suggests that economic interest may have played a role in their position.
MM: Does API have a position on the proposed U.S.-Mexico free trade agreement?
Canes: Yes, we are supportive of the agreement. We are free trade-oriented and support free trade in a number of different contexts. We supported the American-Canada free trade agreement, and we support this one.
We argue that energy ought to be on the table, just like any other area. We would like to see investment in energy resources in Mexico as one of the items that is under discussion. We understand the constraints; there were similar kinds of constraints in Canada, when that free trade agreement was arranged. Experience has suggested that over time the Canadians have become more relaxed about foreign investment in energy resources, and we would hope that the Mexican experience would be similar to that.
MM: Do you anticipate Mexico will agree to allow foreign investment in oil?
Canes: That is another area I know a little about, but not a lot. My understanding is that the Mexican constitution forbids the sale or lease of oil resources to foreign entities. One of the questions has been, given that constraint, are there other kinds of contractual arrangements that can be made that would allow American investment to take place in Mexico without literally owning the Mexican oil? These might include profit- sharing or arrangements under which returns to investors would depend upon the extent of any finds, even though ownership would remain vested in a Mexican entity.
Separately, on a slightly different front, the Mexicans have been relaxing restraints on foreign investment in the petrochemical industry. And so even while investment in crude oil resources has remained tightly constrained - and may continue to be for a while - it may be possible to relax the restraints in some of the other parts of the industry.
Our view, and perhaps even the view in Mexico as well, is that they have a very powerful interest in developing their natural resources. They are trying hard to industrialize and create wealth for their people, and the development of an energy base is very crucial to that. If that is so, being able to secure investment capital from the United States is going to help their development.
MM: Do you anticipate merger-and-acquisition action in the oil industry continuing on the scale of the 1980s?
Canes: Of course I don't know the answer, but right now the trends are that there will be further mergers. Our experience has been that when an industry expands, you see a lot of new entry and new firms. When an industry is in a contraction phase, you see the opposite. That is when you tend to see merger activity go on because you suddenly have excess capacity relative to demand. And this is a contracting industry at this time.
We are contracting in the upstream. Production is falling, there is a drop-off in investment and the drilling rate is very low, probably the lowest since World War II. So there is consolidation going on among producing and exploring firms, and also in the firms that supply equipment to the exploring and producing industry.
We are also seeing contraction in refining and in distribution. We are seeing refineries closed, unable to compete because of a lot of new requirements for investment in environmental protection. And so we are seeing consolidation there, too.
MM: How do you think consolidation affects the industry, both from the producer and consumer perspectives?
Canes: It is a question of what is causing it to happen. If it is that costs are such that you simply can't support the previous number of firms, then, from an industry perspective it is absolutely necessary. The only real options are that firms can go out of business, with their assets on the auction block, or they transition over a longer period to some much reduced state. One way or another assets are going to be taken out. It is a just of question of what process is going to do it.
From a consumer perspective, having less petroleum produced in the United States means that we are going to put increased demands on the world market. All experience teaches that America is one of the big players in the world market. If we demand more from the world market, we use more of the available capacity, and ultimately it puts everyone at a higher risk of disruption and higher prices.
With regard to refining and other processing or distributing facilities, one very important trend in our society has been to demand more environmental protection. But whether it is reformulated fuels or more protections from refinery emissions, we are in effect mandating higher costs per refinery. So, we will pay a price to secure what we want. The question is whether we are going to get socially worthwhile environmental improvements. Surely we will get some reductions in emissions, but are they going to be worth it for the prices we are going to have to pay? We are estimating that the first phase of reformulated gasoline that the EPA is requiring will raise costs several cents a gallon - maybe five to ten cents a gallon, something like that. And a possible second phase, as it may shape up based on recent developments in California, would raise costs 15 to 20 cents a gallon, something like that. So costs are going to rise, consumers are going to pay more, but in return they will get cleaner air. Let's hope the gains justify the costs.
MM: The Oil, Chemical and Atomic Workers union argues that petrochemical companies' increased debt loads, brought on by merger-and-acquisition activity, has caused cutbacks in safety expenditures, which in turn has led to a series of petrochemical plant explosions. Do you think that is the case?
Canes: From what I know about it, I don't think so, no. Any time you are dealing with energy facilities, you always have the potential for accidents because energy is explosive by its very nature.
But the data we have, which cover refineries, show no such trends with regard to accidents and deaths. At most they show a kind of a leveling. We are unable, over the last several years, to find any trend of increasing accident or mortality rates, even though refining has been subject to many of the same forces as petrochemicals.
From one perspective you could say we are not achieving the kinds of gains we would like in cutting down facility-related accidents and so on. On the other hand, there is no trend upward either.
So, from the data we have, I would simply dispute the charge that things have gotten a lot less safe. There is no evidence of that.