What Does the Bush Budget Mean for Renewable Energy?

The first shot has been fired in the Federal Budget War of FY'09 and it ain't pretty.

This Monday, President Bush released his proposed $3.1 trillion budget (that's trillion with a "T"), a 6% increase over the projected $2.9 trillion in spending for FY'08. With such a large number, everyone wins, right? Of course not! This is Washington we're talking about.

As the experts gather to dissect the budget, the headlines have mostly touted the increased spending for Homeland Security and the Defense Department and the cuts proposed in education & health care. But we're looking at commodities. Beyond generalized help for the economy (i.e., Bush's stimulus package), the most important places for us to look are at the energy budgets … and particularly, exploration and renewable energy.

Energy Department Budget

The blurb from the White House states the following about the proposed Energy Department budget:

Increases energy security by focusing on renewables, accelerating technological breakthroughs, and expanding traditional sources to reduce our reliance on foreign oil.

In plain English, Bush is throwing more money at cleaning up coal and at increasing the use of nuclear power in America. This is continued good news for companies that are working on the clean coal technology, and the nuclear power companies who have been trying to run new plants for years.

Renewables

The DOE's Office of Energy Efficiency and Renewable Energy's budget gains just 2% over this year's budget – in other words, it's way below the average increase, and also below the rate of inflation. There are cuts in weatherization programs and in research into hydrogen technology (down 31%), as well as a 7% decrease in solar energy funding. The few real increases come in the area of wind research (up $3 million or 6%) and bioenergy and biorefinery R&D (which received an 8% increase, part of the administration's goal of having cellulosic ethanol cost-competitive by 2012). It should go without saying that numbers like "$3 million" amount to random dust specks in the ebb and flow of federal budgets.

Speaking of ethanol: Ethanol tariffs (the big ones that keep Brazilian ethanol essentially off the market) are set to expire in December 2008, a date which falls inside this FY'09 budget. According to Reuters, Secretary of Energy Sam Bodman has hinted that those tariffs may be on their way out, and that the issue would be addressed in the FY'09 budget.

"I would just say I think that there are advantages to having had the kind of both subsidies and tariffs that have helped protect this industry. I believe that, the best I can tell, this industry is pretty close to being able to stand on its own," Bodman said at the time.

But, as of yet, no changes have been proposed in the Bush budget, unless they're buried somewhere in a footnote and not included in the big numbers. It's unlikely Bush will take any heat on this, as December 2008 rhymes with "after the election" in the patois of American politics.

What is for sure is that Bush has moved away from his emphasis that corn ethanol as the wave of the future and now seems to be putting money on cellulosic ethanol. This makes a certain amount of sense, as despite the pressure from the corn lobby, an awful lot of folks on both sides of the environmental spectrum have expressed increasing skepticism on the long-term viability of corn ethanol as a real substitute for foreign oil.

Science Rules In Nuclear And Coal Sectors

Research in various disciplines gets a big boost in the proposed budget. In the nuclear arena, while energy resource initiatives got cut by 10%, research into high energy physics, nuclear physics and basic energy sciences received an increase of 19%.

Coal wins too: Funding of research into clean coal initiatives is up 40% to $818 million. Included in that is $400 million for carbon sequestration research – capturing emissions from coal-burning power plants and turning them into, among other things, food-grade baking soda. Really. There's another $241 million for demonstration projects to show if it really works.

Oil

The budget calls for continuing to replenish the Strategic Petroleum Reserve, which sold around 11 million barrels of oil after Hurricane Katrina. With the 11 million barrels sold back in 2005 averaging $54 per barrel, and the Energy department's projected average oil price of $85 a barrel, buying back that oil may be cost prohibitive.

"We will run the risk of not getting back the 11 million barrels," U.S. Energy Secretary Sam Bodman told reporters at a briefing on the department's budget. "We intend to use the money to buy the oil." Bodman said the department may hold off purchasing the replacement supplies if oil is too expensive. "If (bids) aren't reasonably priced we won't proceed" with the plan, he said.

And yet, plans are going ahead to expand the reserve's capacity by creating a new site in Mississippi and expanding two existing sites, bringing capacity to 1 billion barrels.

This budget proposal goes beyond that and proposes expanding the reserve to 1.5 billion barrels – double the current capacity. Whether the country can afford to actually fill those giant hypothetical empty tanks at current oil prices remains to be seen, especially with the government's own predictions calling for oil to remain above $85 at least through June. And then there is always the question, if releasing oil from the reserve was enough to, at least temporarily, stabilize prices, what will the impact be of buying that much more oil?

Of course, looking behind the budget numbers to the assumptions may show how the White House is planning to fund the expansion and oil purchases. Once again, drilling in Alaska's Arctic National Wildlife Refuge is on the table, with the White House stating that $7 billion could be raised from leasing fees starting in 2010. Considering that drilling in ANWR is opposed by both leading Democratic presidential candidates and the Democratically controlled congress, the argument in this round of the budget battle may be fairly pointless.

Nice Try

Many say that this budget proposal is dead on arrival. That between the failing economy and the elections, this budget proposal from a lame duck president is at worst a jumping off point for negotiations and at best just fodder for the presidential candidates' speeches. So while it is interesting to see where the budget negotiations are starting from, don't let this first shot influence your commodity investing too much – what you see today will be completely different tomorrow.

Links

White House Budget Request Expects Near-Record Deficit WSJ.com Feb. 4, 2008 11:29am
Bush Boosts Defense Spending in $3.1 Trillion Budget (Update 3) Bloomberg.com Feb, 4, 2008 10:34 EST
U.S. to buy $584 mln of emergency oil by end Sept Guardian Unlimited, Feb. 4, 2008
Bush budget doesn't alter ethanol import tariff Reuters Feb. 4, 2008 4:03pm GMT
Proposed U.S. energy budget for 2009 boosts funding for coal, nuclear, biomass programs; reduces H2, solar and vehicle technology Exchange Morning Post Feb. 5, 2008

Comments

[liac]

nice article!