Social costs of oil and gas leasing on federal lands, carefully considered

OVERVIEW: A report filed with the US Department of the Interior recommended that terms governing the leasing of federal land for oil and gas development be updated to reflect social costs associated with such development. While such costs may be policy relevant, I suggest social costs are smaller than the report indicates and the recommended policy changes are not well focused.

The U.S. Department of the Interior (“Interior”) has begun an effort to update financial terms for oil and gas leases on federal lands. These financial aspects – royalties, minimum acceptable bids, annual rental rates, bonding requirements, and penalty rates – are collectively referred to as “government take.” One issue raised in the effort concerns social costs associated with oil and gas development on federal lands. (As noted earlier, Shawn Regan and I have filed a comment with Interior on the issue.)


Social costs of such development are also among issues addressed in a report filed in the Interior rulemaking docket by Jayni Foley Hein of New York University’s Institute for Policy Integrity. The report provides an overview of the legal requirements governing government take and recommends Interior’s regulations be revised to reflect option value and social costs. Here I focus on social costs.

Hein said social costs are imposed by oil and gas development on federal lands both during development and during production. She wrote:

America’s public lands offer millions of people a place to hike, camp, hunt, fish, and enjoy scenic beauty. They provide drinking water, clean air, critical habitat for wildlife, sites for renewable energy development, as well as natural resources including timber, minerals, oil, and natural gas. As soon as energy exploration begins, competing uses of federal land such as recreational enjoyment, commercial fishing, and renewable energy development are impaired, and continue to be foreclosed for the duration of production.

Hein listed the following social costs of oil and gas activity on federal lands*:

  • Loss of use values (including loss of recreational value, renewable energy development potential, timber value, scenic value, and wildlife habitat)
  • Local air pollution (local effects of methane leakage, emissions from diesel or gas-fueled pumps and other engines)
  • Global air pollution (methane leaks, carbon dioxide)
  • Induced earthquakes from disposal of hydraulic fracturing wastewater
  • Potential oil or wastewater spills and subsequent water contamination from wastewater stored in pits and tanks
  • Noise pollution
  • Increased traffic (wear and tear on roadways, traffic-related fatalities).

She recommended increasing rental rates and royalties to reflect social costs associated with development and production of oil and gas on federal lands.


Naïve application of Hein’s list would likely produce significant over-counting of social costs. Regan and I described social costs as “the sum of all future benefits foregone by one or more persons due to oil and gas development activity on federal lands.” We were imprecise. We cannot simply sum up all possible future foregone benefits, but rather we should focus on the difference in benefits between two specific cases: one case with oil and gas resources leased for development, and a second case in which the land is not leased.

The social costs of oil and gas leasing is the sum of the specific incremental differences in the stream of future benefits associated with the land leased for oil and gas development as compared to the best alternative use. Specification of the second case is key. Assume, for example, that if the property is not leased for oil and gas development, then it would be leased for PV solar power development. Leasing the land for PV solar power also involves some loss of timber value, wildlife habitat, recreational value, and so on. In counting the social costs of oil and gas leasing associated with, say, wildlife habitat, we need to focus on just the difference in wildlife habitat between the two cases. If recreational use is impaired equally, the loss of recreation value is not properly counted as a cost of oil and gas leasing.

Consequences, or rather, the differences in consequences beyond the property itself matter too. It is likely holding a specific tract of property out of oil production has no effect on total world oil production and consumption, and therefore there would be no difference in total air pollution, traffic, potential for oil leaks, and so on. Withholding a particular property out of development primarily would affect the location, not the total amount, of these costs. Location can matter: we likely do not want to increase traffic and local air pollution in already crowded areas. But location does not always matter: the greenhouse gas implications are the same whether a methane leak arises from development on federal land or elsewhere.


A careful identification of the social costs of oil and gas leasing associated with specific federal properties would reveal these social costs to be smaller than a naïve application of Hein’s list may suggest. Federal oil and gas policies governing the government take primarily affect the distribution of social costs, not the total amount. Most relevant social costs are highly localized to the area of development, a feature which should make them easier to manage.

Other issues arise with Hein’s proposal to increase rental rates and royalty rates to account for social costs. While charging a higher royalty rate, for example, would discourage development of federal lands at the margin, it would not encourage operators to minimize social costs on properties that are developed. Other policy levers may be more useful.

*NOTE: The list of social costs is my summary drawn from Hein’s report. We might dispute aspects of the list, but for purposes of this post I am more interested in the social cost concept rather than the particular items listed.

How should the BLM reflect social costs when leasing federal lands for oil and gas development?

In April the U.S. Department of the Interior issued an advanced notice of proposed rulemaking (ANPR) seeking comments on a handful of economic issues surrounding the leasing of federal lands for oil and gas development. Most of the questions raised in the ANPR concern aspects of the “government take” – the royalty rates, minimum bids, annual rental rates, bonding requirements, and non-compliance penalties – arising from the leasing program.

One of the questions asked raises a broader point: “Should the [U.S. Bureau of Land Management (BLM)] consider other factors in determining what royalty level might provide a fair return, such as life cycle costs, externalities, or the social costs associated with the extraction and use of the oil and gas resources? If the BLM should consider such factors, please explain how it should do so.”

In a public interest comment recently filed in the ANPR docket, Shawn Regan of the Property and Environment Research Center and I suggest an answer to this question on social costs. Quoting from our comment:

Federal lands offered for oil and gas leasing often contain a wide range of non-energy characteristics. If the BLM could accurately determine the full social cost of developing energy resources for each property, in principle the value could be employed as a property-specific minimum acceptable bid in the lease auction. Such a change would ensure that properties are developed only when the value of the energy resources produced is expected to be greater than the value of the environmental benefits sacrificed.

Two problems arise. First, under current federal law BLM is constrained to employ a single minimum acceptable bid nationwide. Second, and more importantly, federal lands are potentially valued for a wide variety of use and non-use values, some of which values complement each other and some of which conflict. No method reliably integrates the variety of diverse, predominantly subjective, and sometimes conflicting values into a single, uncontroversial auction reserve price.

We suggest that these subjective and conflicting values could be incorporated into federal land practices by direct participation of recreation, environmental, and conservation groups in oil and gas auctions. Should these groups desire that a property be held out of development, they simply need to outbid oil and gas developers in the lease auction.

In this system, the highest bid from a conservation group serves as a reserve price. An oil and gas developer would have to bid higher than the highest conservation group bid to obtain the lease. Should a conservation group bid the highest, it obtains the rights to either develop oil and gas resources or hold the property out of development. The greater the conservation values at stake, the greater would be the likely bids from conservation groups. The process would at least in part mimic a system in which the BLM could measure the social costs of oil and gas development and employ that measurement as a minimum bid price in the lease sale.

We do not claim our suggestion would work perfectly, only that it provides an approach to bringing social costs into the leasing system and no administrative system would do a better job. Our proposal is not fully developed in the comment filed, but we do address a few obvious questions.

Feedback appreciated, so take a look and let us know what you think.

So far only one other “academic-y” comment filed in the docket. Jayni Foley Hein of the NYU School of Law submitted a detailed report, “Harmonizing Preservation and Production: How Modernizing the Department of Interior’s Fiscal Terms for Oil, Gas, and Coal Leases Can Ensure a Fair Return to the American Public.” (Have not had a chance to read it yet.)

By the way, the deadline for comments in response to the ANPR has been extended to June 19, so if you have a view on social costs or the government take associated with oil and gas leasing on federal lands, feel free to let the Department know how you feel.

Related Knowledge Problem posts include:

The primary reason for quadrennial gasoline price-gouging charges against Marathon in Kentucky

On May 12, 2015 Kentucky Attorney General Jack Conway filed a lawsuit against Marathon Petroleum Company alleging Marathon has engaged in anti-competitive practices that cause higher gasoline prices for Kentucky consumers. In making the announcement Conway said he has tried over and over to get the Federal Trade Commission or U.S. Department of Justice interested in the case, but they have declined to join efforts.

This isn’t the first time a Kentucky Attorney General has gone after Marathon over gasoline prices in the state. On May 13, 2011, AG Conway charged Marathon violated Kentucky’s price-gouging law after floods struck Western Kentucky. On May 10, 2007, then-AG Greg Stumbo filed suit against Marathon alleging price gouging after Hurricanes Katrina and Rita struck the Gulf Coast in late 2005.

Notice a pattern? Every four years during the second week in May Kentucky Attorneys General take on Marathon over gasoline prices.

What else happens every four years in May in Kentucky? Primary elections for state offices. In 2007 Stumbo was a candidate for Lt. Governor in the Democratic Primary held on May 22nd. In 2011 Conway was a candidate for re-election as AG in the Democratic Primary held on May 17th. This year Conway was a candidate for the Governor’s office in the Democratic Primary held on May 19th.

Nobody in Kentucky pays attention to state elections until after the Kentucky Derby, and that gives candidates only two weeks or so before the primary to make a splash. What better way to show voters you are on their side than an opportunistic attack on an oil company?

I conclude that the primary reason for quadrennial gasoline price-gouging charges against Marathon in Kentucky is the state’s Democratic Primary.


Elementary error misleads APPA on electricity pricing in states with retail electric choice

The American Public Power Association (APPA) recently published an analysis of retail power prices, but it makes an elementary mistake and gets the conclusion wrong.

The APPA analysis, “2014 Retail Electric Rates in Deregulated and Regulated States,” uses U.S. Energy Information Administration data to compare retail electric prices in “deregulated” and “regulated” states. The report itself presents its analysis without much in the way of evaluation, but the APPA blog post accompanying its release was clear on the message:

after nearly two decades of retail and wholesale electric market restructuring, the promise of reduced rates has failed to materialize. In fact, customers in states with retail choice programs located within RTO-operated markets are now paying more for their electricity.

In 1997, the retail electric rate in deregulated states — the ones offering retail choice and located within an RTO — was 2.8 cents per kilowatt-hour (kWh) higher than rates in the regulated states with no retail choice. The gap has increased over the last two decades. In 2014, customers in deregulated states paid, on average, 3.3 cents per kWh more than customers in regulated states.

But the APPA neglects the effects of inflation over the 17 year period of analysis. It is an elementary mistake. Merely adjusting for inflation from 1997 to 2014 reverses the conclusion.

The elementary mistake is easily corrected: Inflation data can be found at the St. Louis Fed site. Using the 2014 value of the dollar, average prices per kwh in the APPA-regulated states were 8.4 cents in 1997 and 9.4 cents in 2014. In the APPA-deregulated states the average prices per kwh were 12.5 cents in 1997 and 12.7 cents in 2014.

Prices were up for both groups after adjusting for inflation, but prices increased more in their regulated states (1 cent per kwh, so up about 11.3 percent) than in their deregulated states (0.2 cents; up about 1.4 percent). The inflation-adjusted “gap” fell from nearly 4.1 cents in 1997 to 3.3 cents in 2014.


Surprisingly, the APPA knows that an inflation adjustment would change their answer. The report ignores the issue completely; the APPA blog said:

For example, a recent analysis by the Compete Coalition finds that, after accounting for inflation, rates in restructured states decreased by 1.3 percent and increased by 9.8 percent in regulated states since 1997. The data in the APPA study, which does not account for inflation, show that rates in the deregulated states grew by 48 percent compared to a 62 percent increase for the regulated states.

However, a percentage-based comparison obscures the important fact that the 1997 rates in deregulated states were much greater than those in regulated states.

The Compete Coalition report is not linked in the APPA post, but the data points mentioned are here: “Consumers Continue To Fare Better With Competitive Markets, Both at Retail and Wholesale.”

The remaining differences between my inflation-adjusted APPA values and those of the Compete Coalition likely arise because Texas is in the Compete Coalition’s restructured states category, but not in the APPA’s deregulated states category. Seems an odd omission given that most power in Texas is sold in a quite competitive retail power market. APPA does not say why Texas is excluded from their deregulated category.

According to EIA data [XLS], average power prices in Texas were 9 cents per kwh in 1997, but in 2013 had fallen to 8.7 cents. Both numbers have been adjusted for inflation using CPI-U values from the St. Louis Fed website and reported using the 2014 value of a dollar. The 2013 numbers were the latest shown in the EIA dataset.

Newsweek Cloaks Industry-Funded Environmentalist’s Hit Piece

First, some background

On April 11, 2015, an editorial piece by Randy Simmons and Megan Hansen on the cost of wind energy was published by Newsweek. A DailyKos blogger posted the next day disputing various claims in the piece and observing Newsweek had not disclosed Simmons’s apparent oil industry connections. The day after that the wind energy industry’s lobbying group in Washington, D.C., the American Wind Energy Association, published its reply, more pointed on the topic of Simmons connection, and Media Matters for America chimed in too.

A week later Newsweek added an editorial note to the Simmons and Hansen piece stating Simmons had been the “Charles G. Koch Professor of Political Economy” at Utah State University and was also a fellow at the Property and Environment Research Center. In addition, Newsweek posted a reply op-ed by James Marston, a founding director of the Texas office of the Environmental Defense Fund.

So here we go

Marston pulls no punches in his counterattack on the Simmons and Hansen policy piece in Newsweek: “[Randy] Simmons’ op-ed on the ‘true cost of wind power’ is the same tired slant we have heard from fossil fuel interests time and time again, which should come as no surprise when you learn who’s really behind the piece.”

Get that sinister phrase, “who’s really behind the piece”? Marston apparently believes you can judge a opinion by the company the author keeps. If the author has ever taken money or worked for a project somehow connected to a company, foundation, or industry lobbyist then surely everything the author ever does is tainted, at least in Marston’s view. It is an insulting approach to debate, implying a lack of respect both for people you disagree with and for anyone who might read either the original op-ed or Marston’s reply. It is doubly insulting in the case of an academic like Randy Simmons, who has published several books and peer-reviewed academic articles.

Simmons has presented his best summary of his understanding of the issues. If Marston had respect for his readers, he would do the same. Marston should present his own best substantive arguments, not make tenuous emotional appeals and logically irrelevant ad hominem attacks.

Of course Marston does present some substance in the article that Newsweek rushed into print as a kind of rebuttal to Simmons, but there is a real question as to whether the article is his own work. It certainly looks heavily dependent on the AWEA blog piece written a week earlier by a wind energy industry lobbyist.

Let’s look

On April 13, American Wind Energy Association lobbyist Michael Goggin wrote: “[Simmons] paints a very misleading picture of federal energy incentives by ignoring that study after study has found that subsidies for conventional energy sources have been far larger than those for renewables. The nuclear industry’s own tally shows that all renewable resources accounted for less than 10 percent of federal energy incentives provided over the period 1950-2010, with fossil resources receiving more than 70 percent.”

Eight days later, Newsweek published the following under Marston’s name: “Study after study has shown that subsidies for conventional energy sources, such as coal and oil, historically have been much larger than those for renewables, but Simmons ignores this information. The Nuclear Energy Institute’s own tally indicates all renewable resources made up less than 10 percent of federal energy incentives between 1950 and 2010.”

Phrasing kind of similar, isn’t it. And both of the two sentences in the two pieces include links to the exact same pair of internet locations. Sure, some differences here, Goggin wrote “study after study has found that subsidies for conventional energy source …” while Marston wrote “study after study has shown that subsidies for conventional energy sources ….” In the second sentences quoted both pieces embed a link using exactly the same word as anchor: “tally.”

Again, from Goggin on the 13th of April: “Last month, independent expert DBL Investors analyzed the data and found that states with the most use of renewable energy have lower electricity prices, while also observing that states with pro-renewable policies have seen lower electricity price increases than other states.”

Eight days later from Marston: “Moreover, last month, independent DBL Investors found states with the greatest use of renewable energy experience lower electricity prices, and states with pro-renewable policies have seen lower electricity price increases than those without.”

Once again similar phrases, once again both use a one-word internet link, once again it is same word (‘found’) in both the industry lobbyist’s blog post and the environmentalist’s Newsweek article, and the link in both cases goes to the same internet-accessible report.

A little later a paragraph on electric transmission repeats the same two main points using similar language, link to the same two internet sources, and use the same words to link to these same resources. Oh wait, not quite identical: where the industry lobbyist Goggin used the words “more than pay for themselves” to anchor a link, the environmentalist Marston used the words “more than paying for themselves.”

One more example. Goggin, the lobbyist, wrote: “The claim that wind energy is having an undue impact on other energy sources has been thoroughly rejected by a number of experts, including former Federal Energy Regulatory Commissioner John Norris.”

Eight days later in Newsweek, under Marston’s name, appears this sentence: “This claim that wind energy is having an undue impact on other energy sources has been thoroughly debunked by a number of experts, including former Federal Energy Regulatory Commissioner John Norris.”

In Goggin’s version of the sentence the words “thoroughly rejected” link to an AWEA report and in Marston’s version the words “thoroughly debunked” link to the same AWEA report. In both sentences the name “John Norris” anchors links to the same blog post on the AWEA website.

Marston’s version does include a few links not in the week-earlier blog post of the wind energy industry group, and some of the weaker, earlier points made by Goggin are omitted from Marston version. The Marston version is heavily rearranged. But it is clear that significant parts of the Marston version are a not so expert gloss on the blog post put out by the wind energy industry.

One thing you can say for Marston, he believes in recycling.

Marston and EDF

Marston has been working environmental issues in Texas for several decades, so clearly he is both committed to the cause and has a thick skin. His reputation is not at stake here, because he has done so much more. But he and the Environmental Defense Fund of Texas ought to be embarrassed to have this piece published in Newsweek with their names attached.

What of Newsweek?

Issues of plagiarism and industry ties are raised here. Newsweek took a lot of flack online for initially publishing the Simmons piece without mentioning apparent connections to fossil fuel interests, and became convinced to append a comment. Is Newsweek interested in Marston’s connections to the wind energy industry (or DailyKos or Media Matters, etc.)?

Marston’s employer has partnered up with wind turbine manufacturers like General Electric and wind-farm owning electric utilities like Duke Energy and NextEra Energy on various projects. GE Corporation has a representative on the AWEA’s board of directors, and so does NextEra Energy. [Edited, see below. -MG]

Newsweek ought to disclose both the, uh, affinities (if we do not call it plagiarism) between the Marston opinion piece and the wind energy industry lobbyist’s blog post, and the multiple financial ties between the wind energy industry, it’s lobbyists in Washington, DC, and Marston’s employer.

By the way…

I’m not a disinterested observer here. In his Newsweek piece Simmons favorably cited work I did that was funded by the Institute for Energy Research. Goggin attacked my work on the AWEA blog (“Fossil-funded think tank strikes out on cost of wind“). For that reason, I am placing this material here and inviting you to think for yourself.

[About two weeks ago I emailed seeking comments from Marston and EDF of Texas, Goggin at AWEA, Newsweek, and the Washington Post‘s Eric Wemple who had blogged about the controversy over the Simmons piece. Other than a quick reply from Wemple acknowledging my email, I have seen no reaction.

My title “Newsweek Cloaks Industry-Funded Environmentalist’s Hit Piece” is patterned after the Media Matters headline “Newsweek Cloaks Koch-Funded Professor’s Dirty Energy Agenda.”

NOTE ON EDIT: I had initially claimed that Marston’s employer, EDF, was represented on the AWEA board. As Michael Goggin commented below, the EDF on the AWEA board is the France-based international energy company not the Environmental Defense Fund.]

How cool is this? A transparent solar cell

I’ve not been sharing enough of my “how cool is this?” moments, and believe me, I’ve had plenty of them in the digital and clean tech areas lately. I find this one very exciting: Michigan State researchers have developed a fully transparent solar cell that could be used for windows or device screens:

Instead of trying to create a transparent photovoltaic cell (which is nigh impossible), they use a transparent luminescent solar concentrator (TLSC). The TLSC consists of organic salts that absorb specific non-visible wavelengths of ultraviolet and infrared light, which they then luminesce (glow) as another wavelength of infrared light (also non-visible). This emitted infrared light is guided to the edge of plastic, where thin strips of conventional photovoltaic solar cell convert it into electricity. [Research paper: DOI: 10.1002/adom.201400103– “Near-Infrared Harvesting Transparent Luminescent Solar Concentrators”] …

So far, one of the larger barriers to large-scale adoption of solar power is the intrusive and ugly nature of solar panels — obviously, if we can produce large amounts of solar power from sheets of glass and plastic that look like normal sheets of glass and plastic, then that would be big.

The energy efficiency numbers are low, 1%, but they estimate they could go up to 5%. Figuring out how much cost this TLSC technology adds to large panes of glass and comparing that to alternative electricity prices is the next step in assessing its commercial viability. But the technology is seriously cool.


Government failure and the California drought

Yesterday the New York Times had a story about California’s four-year drought, complete with apocalyptic imagery and despair over whether conservation would succeed. Alex Tabarrok used that article as a springboard for a very informative and link-filled post at Marginal Revolution digging into the ongoing California drought, including some useful data and comment participation from David Zetland:

California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.

California’s drought is a failure to implement institutional change consistent with environmental and economic sustainability. One failure that Alex discusses (and that every economist who pays attention to water agrees on) is the artificially low retail price of water, both to residential consumers and agricultural consumers. And Alex combines David’s insights with some analysis from Matthew Kahn to conclude that the income effect arguments against higher water prices have no analytical or moral foundation — San Diego residents pay approximately 0.5 cents per gallon (yes, that’s half a penny per gallon) for their tap water, so even increasing that price by 50% would only decrease incomes by about 1%.

There’s another institutional failure in California, which is the lack of water markets and the fact that the transfer of water across different uses has been illegal. Farmers have not been able to sell any of their agricultural allocation to other users, even if the value of the water in those other uses is higher. According to the California Water Code as summarized by the State Water Resource Board,

In recent years, temporary transfers of water from one water user to another have been used increasingly as a way of meeting statewide water demands, particularly in drought years. Temporary transfers of post 1914 water rights are initiated by petition to the State Board. If the Board finds the proposed transfer will not injure any other legal user of water and will not unreasonably affect fish, wildlife or other instream users, then the transfer is approved. If the Board cannot make the required findings within 60 days, a hearing is held prior to Board action on the proposed transfer. Temporary transfers are defined to be for a period of one year or less. A similar review and approval process applies to long-term transfers in excess of one year.

Thus in a semi-arid region like California there’s a large rice industry, represented in Sacramento by an active trade association. Think of this rule through the lens of permissionless innovation — these farmers have to ask permission before they can make temporary transfers, Board approval is not guaranteed, and they are barred from making permanent transfers of their use rights. One justification for this rule is the economic viability of small farming communities, which the water bureaucrats believe would suffer if farmers sold their water rights and exited the industry. This narrow view of economic viability, assuming away the dynamism that means that residents of those communities could create more valuable lives for themselves and others if they use their resources and talents differently, is a depressing but not surprising piece of bureaucratic hubris.

Not surprisingly in year 4 of a drought, these temporary water transfers are increasing in value. Just yesterday, the Metropolitan Water District of Southern California made an offer to the Western Canal Water District in Northern California at the highest prices yet.

The offer from the Metropolitan Water District of Southern California and others to buy water from the Sacramento Valley for $700 per acre-foot reflects how dire the situation is as the state suffers through its fourth year of drought. In 2010 — also a drought year — it bought water but only paid between $244 and $300 for the same amount. The district stretches from Los Angeles to San Diego County. …

The offer is a hard one to turn down for farmers like Tennis, who also sits on the Western Canal Water District Board. Farmers can make around $900 an acre, after costs, growing rice, Tennis said. But because each acre of rice takes a little more than 3 acre-feet of water, they could make around $2,100 by selling the water that would be used. …

If the deal is made, Tennis said farmers like himself will treat it as a windfall rather than a long-term enterprise.

“We’re not water sellers, we’re farmers,” he said.

And that’s the problem.