Tim McDonnell

Tim McDonnell

Climate Desk Associate Producer

Tim McDonnell joined Climate Desk after stints at Mother Jones and Sierra magazine. He remains a cheerful guy despite covering climate change all the time. Originally from Tucson, Tim loves tortillas and epic walks.

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Here's the Big Problem With Those Low Gas Prices Obama Is So Happy About

| Thu Jan. 14, 2016 4:07 PM EST

In his State of the Union address this week, President Barack Obama gave an approving nod to the price of oil, which is now the lowest it has been in more than a decade.

"Gas under two bucks a gallon ain't bad, either," he said.

For motorists, that logic is unassailable. But depending on where in the country you live, the low oil price could come back to haunt you in unexpected ways. According to new federal data, half a dozen states with prominent oil drilling industries have taken heavy blows to their budgets. That could prompt a sweep of spending reductions and cuts to education, poverty programs, and other social services.

"It could be hugely problematic for some of these states," said Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities.

The data show a steep drop in revenue from severance taxes, which natural resource companies pay to states when they extract oil, coal, or natural gas. When oil prices drop, oil production drops next, followed by severance tax revenue. And for states such as Alaska, Wyoming, and North Dakota, which draw a majority of their income from severance taxes, that means the budget can quickly implode. Now, policymakers in those states are scrambling to make up the shortfall in other ways and decide which state programs could face the chopping block.

Alaska's decline in revenue has been especially severe:

EIA

The Energy Information Administration report notes that Alaska's severance tax income—which provides three-quarters of the state's budget—went from $5 billion in 2012 to practically zero in 2015. As the New York Times reported, that drop has the state's governor considering re-instating an income tax for the first time in 35 years. Meanwhile, legislators in North Dakota are considering cutting $100 million in spending after tax revenues came in nearly 10 percent lower than expected. Even though oil production there hasn't changed much, the EIA found that "total severance tax revenues fell from more than $3.5 billion in 2014 to $2 billion in 2015 as oil prices declined."

A similar story is playing out in Oklahoma, where, the EIA notes, "collections from state sales taxes and individual and corporate income taxes are also significantly affected by oil and natural gas prices":

EIA

Trying to predict oil prices far out into the future is a fool's errand, so it's hard to say how lasting the damage to these states could be. Still, there's reason to think that the oil market is in for a bumpy road ahead, thanks to a growing market for electric vehicles, increasing fuel efficiency standards, and high volumes of oil coming out of Saudi Arabia and other OPEC countries. According to Bloomberg, oil demand in the US is flatlining even as nationwide oil production increases:

BNEF

The current tax crisis could signal an urgent need for oil-reliant states to diversify their tax base, Leachman said.

"There's no question it's not sustainable in Alaska," he said. Other states are at risk of following suit. "You're going to have to rethink your strategy for funding public services if you think oil and gas prices are going to stay really low levels."

The Company Behind Keystone XL Now Wants $15 Billion From US Taxpayers

| Thu Jan. 7, 2016 3:42 PM EST

In November, environmentalists were ecstatic when President Barack Obama decided not to grant a permit for the Keystone XL pipeline. But TransCanada, the company behind the project, was not so happy. On Wednesday, it filed a lawsuit against the federal government seeking to overturn the permit rejection. At the same time, it gave notice that it plans to pursue compensation under the North American Free Trade Agreement, to the tune of $15 billion. 

In its NAFTA complaint, TransCanada alleges that "the politically-driven denial of Keystone's application was contrary to all precedent; inconsistent with any reasonable and expected application of the relevant rules and regulations; and arbitrary, discriminatory, and expropriatory."

In other words, TransCanada thinks it got misled and ripped off by the Obama administration, just to satisfy a wacky cabal of tree huggers. Now, it wants the US Treasury to cough up an apology in cash.

"It's very troubling if every time the president makes a decision in the interest of the people, he's risking an enormous liability of this sort."

NAFTA is a trade agreement between the United States, Canada, and Mexico that's meant to protect trade between those countries. One provision of the agreement, Chapter 11, allows a corporation in one country to sue the government of another country if it feels that country's regulations unfairly discriminate against it. It's a provision that has always been highly controversial with environmentalists, since it provides an avenue for corporations to contest another country's environmental policies, as TransCanada is doing now.

That strategy is unlikely to succeed, according to David Wirth, a professor of international trade law at Boston College and a leading expert on international environmental disputes. Wirth said he actually used this very question—could TransCanada win a NAFTA case against the United States?—on a recent exam, and the answer was pretty clearly no. First off, although TransCanada claims to have spent around $3 billion preparing to build the Keystone XL pipeline, it's not clear that this would actually count as an "investment" that was illegally taken from the Canadian company by the US administration.

"They knew that without the permit approval the project wouldn't go forward," Wirth said. "So any money spent in advance is purely speculative."

Second, although the complaint claims that "environmental activists…turned opposition to the Keystone XL Pipeline into a litmus test for politicians—including US President Barack Obama," it's not clear how that really constitutes a legal problem.

"The president, in making a decision in the national interest, has to weigh a variety of factors, including arguments of environmentalists," Wirth said. "Just because there was political disagreement doesn't mean the process was defective."

But most importantly, Wirth said, TransCanada's complaint doesn't distinguish between a bureaucratic trade decision that treated a foreign company unfairly—the kind of action NAFTA is supposed to prevent—and a decision made by the president for the benefit of public health and the environment.

"The intent of NAFTA was not to require governments to pay every time they take an action that's in the public interest," Wirth said. "It's very troubling if every time the president makes a decision in the interest of the people, he's risking an enormous liability of this sort."

The US has a good track record on NAFTA suits brought by foreign corporations, having lost just one of 14 since the agreement came into effect in 1994. Wirth said NAFTA tribunals have tended to set a pretty low bar for the minimum standard of treatment foreign companies should expect to receive. In other words, TransCanada would have to prove that it was treated exceptionally unjustly by the Obama administration, not just that it had a frustrating experience.

As for TransCanada's federal lawsuit seeking to reverse Obama's ruling, the odds for that aren't great either, since US courts have previously found that cross-border pipelines really are the president's decision to make, according to Reuters.

Sorry, TransCanada. Maybe try for the permit again in 2017 if a Republican wins the White House. Until then, you might be out of luck.

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