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Four new anticipated novels about the decline of oil and gas prices

Harlequin novel cover“We are drowning in information but starved for knowledge,” said John Naisbitt, American author and public speaker. Because of this fact, intuition and instinct, rather than rational thinking, often guides leadership behavior. Guess right, based on what your intuitive self or instinct tells you concerning your iterative policy decisions — particularly the big ones — and the payoff for you and the nation may well be significant. Guess wrong, and the nation could be hurt in various ways and you might not be around for a long time, or get buried in an office close to a windowless washroom. Charles Lindblom, noted political scientist, probably said it correctly when he noted that in complex environments we often make policy by “muddling through.”

Confusion reigns and analyses are opaque and subject to quick amendment concerning the current, relatively rapid decline in oil and gasoline prices. Indeed, key government institutions such as the EIA (Energy Information Administration) and the IEA (International Energy Agency) appear to change their predictions of prices of both, almost on a daily basis. Oil and gas production, as well as price evaluations and predictions resulting from today’s imprecise methodologies and our inability to track cause-and-effect relationships, convert into intriguing fodder for novels. They do not often lend themselves to strategic policy direction on the part of both public and private sector. Sometimes, they do seem like the stuff of future novels, part fiction, and, perhaps, part facts.

Ah … the best potential novels on the decline of oil and gas, particularly ones based on foreign intrigue, will likely provide wonderful bedtime reading, even without the imputed sex and content of the old Harlequin book covers and story lines. Sometimes their plots will differ, allowing many hours of inspirational reading.

Here are some proposed titles and briefs on the general theme lines for four future novels:

An Unholy Alliance: The Saudis and Qatar have joined together in a new alliance of the willing, after secret conversations (likely in a room under a sand dune with air conditioning built by Halliburton, in an excavated shale play in the U.S., a secret U.S. spaceship, or Prince Bandar’s new jet). They have agreed to resist pressure from their colleagues in OPEC and keep both oil production and prices low. By doing so, they and their OPEC friends would negatively affect the Russian and Iranian economy and limit ISIS’s ability to convert oil into dollars. Why not? The Russians and the Shiite-dominated Iranians have supported Syria’s Assad and threated the stability of Iraq. Qatar and the Saudis support the moderate Syrian rebels (if we can find them) but not ISIS, and are afraid that Iran wants to develop hegemony over Iraq and the region, if they end up with the bomb. Further, ISIS, even though it’s against Assad, is not composed of the good kind of Sunnis, and has learned a bit from the Saudis about evil doings. If ISIS succeeds in enlarging the caliphate, it will threaten their kingdoms and the Middle East. According to a mole in the conversations, Russia was really thrown into the mix because, sometimes, it doesn’t hurt to show that you might be helping the West while paying attention to market share.

OPEC in Fantasy Land: Most OPEC members see U.S. oil under their bed at night and have recurring nightmares. “Why,” they asked, “can’t we go back to the future; the good old days when OPEC controlled or significantly influenced oil production and prices in the world?” Several members argued for a counter intuitive agreement.

Let’s surprise the world and go against our historical behavior. Let’s keep prices low, even drive them lower. It will be tough on some of us, whose budgets and economy depend on high oil prices per barrel, but perhaps our “partner” nations who have significant cash reserves, like my brothers (the hero of this novel started to say sisters, but just couldn’t do it) in the Kingdom, can help out.

Driving prices lower, agreed the Saudis, will increase our collective market share (really referring to Saudi Arabia), and may permanently mute any significant competition from countries such as Russia, Mexico, Iraq, Venezuela, and others. But, most importantly, it will probably undercut U.S. producers and lead to a cutback in U.S. production. After all, U.S. production costs are generally higher than ours. Although some delegates questioned comparative production cost numbers and the assumption that the U.S. and its consumer-driven politics will fold, the passion of the Saudis will win the day. OPEC will decide to continue at present production levels and become the Johnny Manziels of oil. Money, money, money? Conspiracy, conspiracy, conspiracy!

Blame it on the Big Guys: The U.S. will not escape from being labeled as the prime culprit in some upcoming novels on oil. The intuitive judgments will go something like this: Don’t believe what you hear! U.S. producers, particularly the big guys, while worried about the fall in oil and gas prices, on balance, believe both will have intermediate and long-term benefits. They have had it their way for a long time and intuitively see a rainbow around every tax subsidy corner.

Why? Are they mad? No? Their gut, again, tells them that what goes down must come up, and they are betting for a slow upward trend next on the following year. Meanwhile, technology has constrained drilling costs. Most feel they can weather the reduced prices per barrel and per gallon. But unlike the Saudis and other OPEC members, they are not under the literal gun to meet national budget estimates concerning revenue. Like the Saudis, however, with export flexibility in sight from Congress, many producers see future market share as a major benefit.

Split Dr. Jekyll and Mr. Hyde personalities exist among the U.S. producers. Jekyll, reflecting the dominant, intuitive feeling, supports low prices. The Saudis and OPEC can be beaten at their own game. We have more staying power and can, once and for all time, reduce the historic power of both concerning oil. While we are at it, big oil can help the government put economic and political pressure on Russia, Iran and ISIS, simultaneously. Wow, we may be able to get a grant, change our image, a Medal of Freedom and be included in sermons on weekends!

Hyde, who rarely shows up at the oil company table until duty calls, now joins the group. He offers what he believes is sage, intuitive advice. He is the oldest among the group and plays the “you’re too young to know card” a bit, much to the chagrin of his younger colleagues. He expresses some rosy instincts about the oil market but acknowledges the likelihood that the future is uncertain and, no matter what, price cycles will continue. He acknowledges that there might be a temporary reduction of the political pressure to open up the fuel markets and to develop alternative fuels because of present relatively low prices. However, based on talking to his muses — both liberals and free market conservatives — and reading the New York Times, he suggests that it might not be a bad idea to explore joining with the alternative fuel folks. Indeed, Hyde indicates that he favors adding alternative fuel production to the production menu of many oil companies. If this occurred, oil companies could hedge bets against future price gyrations and maybe even win back some public support in the process. The industry also might be able to articulate their overblown claim that the “drill, baby, drill” mantra will make the U.S. oil independent. (At this point, the background music in the room becomes quite romantic, and angelic figures appear!) Hyde doubt that going after global market share would bring significant or major early rewards because of current regulations concerning exports and may interfere with the health of the industry in the future as well as get in the way of the country’s still-evolving foreign policy objectives.

Tough sell, however! Contrary to Hyde’s desires, Jekyll carries the day and “kill the bastards” (assumedly the Saudis) becomes the marching orders or mantra. Let’s go get ‘em. Market share belongs to America. Let’s go see our favorite congressperson. We helped him or her get elected; now is the time for him or her to help us eliminate export barriers. A U.S. flag emerges in the future novel. Everyone stands. The oil groupies are in tears. Everybody is emotional. Even Hyde breaks down and, unabashedly, cries.

David and Goliath: Israel has also become a lead or almost lead character in many potential novels on oil. According to its story line, because of Israel’s need for certainty concerning U.S. defense commitments, it has convinced the “best in the west” to avoid a significant reduction in drilling for and the production of oil. Israel advises the U.S. to extend its security-related oil reserves! Glut and surplus are undefined terms. Compete with the Saudis. Drive the price of oil lower and weaken your and our enemies, particularly Iran and Russia. The U.S. should play a new and more intense oil market role. For some, an alliance among U.S.-Israel and other western nations to keep oil and gas prices low is not unimaginable and, indeed, seems quite possible. What better way to anesthetize Iran and Russia? Better than war! An Iran and a Russia unable to unload their oil at what it believes are prices sufficient to support their national budgets would be weakened nations, unable to sustain themselves and meet assumed dual objectives: defense and butter. Finally, what more “peaceful” way to deal with Hezbollah and Hamas, to some extent, than to cut off Iran’s ability to lend them support?

Each of the future novels summarized above clearly suggests some reality driven by what we know. But overall, each one has a multitude of equally intuitive critics with different facts, hypotheses, intuition and instincts. As indicated earlier, it is too bad we cannot generate better more stable analyses and predictions. For now, however, just realize how complex it is to rest policy as well as behavior on, many times, faulty projections and intuition or instinct. Borrowing a quote by the noted comic and philosopher, George Carlin, “tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.” Similarly, restating but changing and adding words, a quote from the Leonard Bernstein of science, Carl Sagan, that the nuclear arms race (if it does occurs in the Middle East) will be like many “sworn enemies waist-deep in gasoline,” the majority with many matches and one or two with only a few matches.

Novels and Alternative Fuels:

Where does this all leave us with respect to alternative fuels and open fuel markets? Too many producers and their think tank friends believe that low oil and gas prices will reduce the likelihood that alternative fuels will become a real challenge to them in the near future. They, instinctively, opine that investors, without patient money, will not risk funding the development of alternative fuels because prices of oil and gas are so low. Further, their “house” economists argue that consumers will be less prone to switch from gasoline to alternative replacement fuels in light of small or non-existent price differentials between the two.

The truth is that we just don’t know yet how the market for alternative fuels and its potential investors will respond in the short term to the oil and gas price crash. Similarly, we don’t know how long relatively low prices at the pump will last. We do know that necessity has been and, indeed, is now the mother (or father) of some very important U.S. innovations and investor cash. In this context, it is conceivable that some among the oil industry may well add alternative fuels to their portfolio to mute boom, almost boom and almost bust or bust periods that have affected the industry from time immemorial. Put another way, protecting the bottom line and sustaining predictable growth may well, in the future, mean investing in alternative fuels.

Low gas prices presently will likely be followed by higher prices. This is not a projection. History tells us this: importantly, lower gas prices now may well build a passionate coalition of consumers ready to, figuratively, march, if gas prices begin to significantly trend upward. The extra money available to consumers because “filling ‘er up” costs much less now, could well become part of household, political DNA. Keeping fuel prices in line for most consumers, long term, will require competition from alternative fuels — electricity, natural gas, natural gas-based ethanol, methanol, bio fuels, etc. Finally, while our better community-based selves may be dulled now by lower gas prices, most Americans will probably accept a better fuel mousetrap than gasoline because of their commitment to the long-term health and welfare of the nation. But the costs must be competitive with gasoline, and the benefits must be real concerning GHG reduction, an enhanced environment and less oil imports. My intuition and instincts (combined with numerous studies) tell me they will be! Happy Holidays!

Oil Refineries, Oil

Bloomberg: U.S. Refineries Boost Oil Use to Record as Prices Plunge

Refiners in the U.S. used the most oil ever last week, taking advantage of crude prices tumbling to a five-year low.

Plants processed 16.6 million barrels a day of crude in the week ended Dec. 5, the most in Energy Information Administration data going back to 1989. The rise occurred as futures tumbled to the lowest in more than five years after the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain output levels and as U.S. production climbed to the highest level in three decades.

The access to cheaper domestic crude and natural gas has enabled U.S. refiners to increase operating rates to above 95 percent for the first time since 2005, increasing gasoline supply and driving down prices at the pump to the lowest level in more than four years. Refineries have used more crude in each of the past six weeks as seasonal turnarounds wound down.

Read more at: Bloomberg

Oil Price, Oil, Plunge, Market Watch, Oil Collapse

Market Watch: Here are the reasons oil is plunging toward $60

[Slideshow] Oil’s stunning price collapse is undoubtedly one of 2014’s top stories and will remain a major theme for investors in 2015. Here’s a look at the factors that have led to the largest price decline since the 2008 financial crisis.

Indeed, oil futures CLF5, -2.94%  have plunged 39% from the beginning of the year, including carnage in Thursday trading that saw oil settle below $60, at $59.95, marking its lowest settlement price since July 14, 2009, while Brent LCOF5, -1.62%   is down about 42% for the year (though marginally higher in Thursday trade).

Read more at: MarketWatch

Gas, Gas Prices, Pumps, Oil, Los Angeles Times

Los Angeles Times: Falling gas prices may boost the U.S. economy

For the first time in four years, Los Angeles drivers are paying less than $3 on average for a gallon of gasoline, part of a nationwide free-fall in fuel prices that could provide a substantial boost to the economy.

Because they’re spending less at the pump, Americans are expected to shell out more on holiday gifts, parties and travel this year. Airlines are projected to pass some of their fuel savings along to consumers next year. Businesses with previously hefty fuel bills may find room now to lower prices or increase wages.

Read more at: Los Angeles Times

 

 

Abbott and Costello, war, sectarianism and Middle Eastern oil — a trifecta

Abbott & CostelloI bet only those on Medicare, like me, remember the old Abbott and Costello joke, “Who’s on first, What’s on second, I Don’t Know is on third”… or something like that.

The dialogue was funny at the time. But the joke, in some respects, tracks the current, very serious situation in the Middle East: Who’s on first, a very militant Sunni group called ISIS; What’s on second, well maybe Iraq (if it can get its act together, which is increasingly unlikely); and, I Don’t Know exactly who’s on third, maybe the Peshmerga from among the Kurdish Regional State in Iraq and, perhaps soon, a surprise addition from the Kurdish PKK military group living among Kurds in Turkey. Who are the umpires? Perhaps Israel. Maybe OPEC. How about the world’s respected ethicists — if they can ever agree.

Isn’t this fun? Let’s try it again, for there are several possible lineups. Let’s try this one: Who’s on first, how about the Assad-related Shiites in Syria. What’s on second, the new caliphate in Iraq and Syria. I Don’t Know exactly who’s on third, maybe, but unlikely, in light of its numerous conflicting interests (e.g., NATO, Islam, etc.), Turkey. Who’s the hapless lonely umpire or umpires at home plate? Perhaps, the U.N. — the so-called moderate rebels. Perhaps the USA, England or France, or perhaps all three. After all, each Western country has had, at best, a difficult, morally ambiguous historical record in the area, and faces a tough, complex future. Justice and fairness have not always guided their respective objectives and actions. If you believe they have, step up to the plate and you can buy the Brooklyn Bridge for a dollar.

It’s a crazy baseball game! I know the Israelis are in the stands but they have found it tough to get emotional. In their view, at least, both of the team’s captains are Iranian. Since it’s not in the official lineup, the game has little meaning to the Israelis.

We are not sure that all the batters, base runners and umpires are on the same team or in the same game. At times, some players appear to run right and some left. Some run into each other. Others don’t run at all. Most appear to be playing by Middle Eastern norms, which mean they frequently change uniforms, roles, rules and alliances. The umpires seem to be confused and frustrated. They may be ready soon to go for a higher legal or spiritual reviewer but they cannot agree on which one (e.g., the International Court of Justice, God or his or her surrogate).

I yearn for the simplicity of just a year or two ago — before ISIS. Many of our leaders and media types referred to America’s role then in terms of seeking stability in the Middle East. Some even suggested, often knowing better, that it was based on a commitment to establishing western-style democracy. Very few played Don Quixote, or even a good forensic economist searching for the truth. U.S. and Western involvement in the Middle East for a long time has been, to a large degree, premised on dependency on oil. As dependency on oil imports was recently reduced significantly to about 30-35 percent of total oil use because of tight oil development, increased fuel standards, and a slow growth economy, the U.S. has agreed to defend our allies’ right to unfettered international oil transportation from wellhead to refinery.

Democracy and oil proved to be an uneasy mix. Secular animosity and intense internal as well as external competition for oil revenue and market share seemed much more difficult than the naive assertion made after 9/11 that the Iraq citizenry would welcome U.S. military with cheering crowds — shades of WWII after U.S. troupes retook Paris. If only it could have been!

What has occurred in the past year or so has once again shifted the game players, the rules and roles (the ecology of Middle Eastern games). The rise of ISIS and its quick absorption of land in both Syria and Iraq combined with its brutality toward the vanquished in captured territories as well as detained westerners has shifted U.S. and its new coalition’s (e.g., England, France, Saudi Arabia, Qatar, Iraq, Kurds, etc.) attention away from getting rid of Assad to stopping establishment of the caliphate. No longer is democracy a major goal. How could it be with such tested democratic states as Saudi Arabia and Qatar front and center? I shouldn’t be cynical…or should I? Now the focus is on stability — translated: salvage what can salvaged from what is left of Iraq and assumedly prevention of what appears to be an increasing sectarianism from disintegrating into wars fought over God and Mammon or maybe my God and your Mammon or vice versa. The new coalition led by the U.S., apart from the British and French includes:

  • Implicitly, Iran, despite Iran’s enmity and its support of groups like Hamas and Hezbollah.
  • Syria, despite its vicious regime, a regime that has killed or terrorized large sectors of its population, far more than ISIS has to date and probably will far into the future.
  • Qatar, whose chameleon foreign policy reminds one constantly of Ronald Reagan’s quote about the Russians, “Trust but verify.”
  • Saudi Arabia, a Sunni-dominated kingdom, that, until the Arab Spring, seemed reasonably secure in its religious, non-democratically based, very conservative legal framework, as well as a caste and class system based on discrimination and corruption.
  • Iraq, a country that, despite U.S. support, is a nation in name only. It is divided by sectarianism into at least three potential would-be nations — each one dominated by dominant religious and ethnic groups. Its central government is unable or unwilling to secure consensus as to governance and military approaches. Its army, despite years of U.S.-supported training and U.S.-supplied weaponry has been, up to now, no match for ISIS. Its sectarian-controlled militias are not committed to consensus building and may end up as a threat to further nation building.

The new coalition has shaken up the Middle East and suggests the old adage that, “The enemy of my enemy is my friend.” Endorsement of the present nation states in the Middle East, as well as opposition to territorial aggrandizement and religious extremism, provides the rationale for U.S. and Western involvement in the current war.

But, irrespective of the coalition’s normative marching orders about stopping extremism and a big land grasp, I suspect that oil or trafficking in oil remains a key factor, indirectly or directly, in back-room decisions to push back ISIS boundaries. Let’s see: the Saudis must soon consider increasing the price of a barrel of oil if it is to avoid the need to cut back on services to its citizens and risk tension. It also must soon consider an increase in oil prices if it is to sustain its defense budget in terms of the present conflict with ISIS. While the U.S. has surpassed the Saudis in oil production, Saudi oil is needed by the West and Asia to avoid significant future price rises premised on future growth. As a result, the U.S. will remain a protector of oil transit. Apart from fearing the collapse of Iraq for political, economic and moral reasons, the U.S. is still committed to safeguarding Iraq’s oil and the oil from one of its regions, the Kurdish Regional Government, for its allies and also for the revenue needed by both. Qatar is a conundrum. Today, it’s a western ally against ISIS; yesterday, reports indicated it supported militants in the Gaza. Which twin has the Tony? Where will it be tomorrow? Finally, remember ISIS needs oil for revenues to function as a government.

If only! If only we could find home-grown, market-acceptable substitutes for oil and its derivative gasoline that would relieve any hint or suspicion that oil or gasoline would be even an indirect consideration in a U.S. or Western nation decisions to go to war. We are not there yet, in terms of the majority of the vehicle owners. But we are getting close with alcohol-based fuels, biofuels, and hydrogen and electric cars.

Oil pipeline,

Rail vs. pipeline: Which is safer for moving oil?

John Hofmeister: What changes are needed for transporting crude throughout North America?

It’s not like this is a new topic, considering that transportation of crude has been taking place for more than a century. The first priority for transporting crude throughout North America should be safety; the second is efficiency, or cost. Safety and efficiency must be predicated on known risk, meaning that experience and technical capability help determine the possibilities and they can help rank order factual, not hypothetical, conclusions.

Fact-based analysis says that transportation by tanker or barge from port to port is both safe and efficient. Large quantities of transported crude oil provide efficient use of rugged vessels that transport without issues for years. Moving oil from where it is produced to ports for transport is clearly safest and efficient when it is transported by pipelines designed fit for purpose for the task at hand. Pipelines are undeniably the lowest risk and most efficient means of transport onshore for point to point movement. They require both regulation and ongoing inspection and maintenance and should be replaced based on predetermined age and risk factors.

Read more at: Wall Street Journal

By health check or economic necessity: A tale of two oil industries and their response to illness

By John Hofmeister and Marshall Kaplan

shutterstock_118647259A bad cold starts with a tickle in the throat and a languid day. It grows to painful swallows, stuffed sinuses and likely a fever. Does the patient treat the symptoms? Does he or she transform to avoid illness in the future?

Few oil company players will admit to it yet, but the future threatens a very bad cold for the current industry, or worse. Very few feel it coming because current business plans are robust and the workload is on overload. When they are recognized, the threats to the current business model are going to take more than treating the symptoms; there are transformative requirements to avoid getting permanently sick, including, for many, a difficult transition to alternative fuels. The industry’s investors are not likely to remain committed to oil. Neither are the politicians, the Wall Street analysts and the public who, for different reasons, some economic and some with concerns for the environment, are already shaky with respect to the future of oil. Unenthused investors actions, however, will speak much louder than concerned words.

Everyone agrees that conventional oil has peaked. Unconventional oil may be abundant, but it’s expensive. It’s so expensive that industry valuation is already being impacted by worried investors who don’t like companies borrowing cash to pay dividends. Shale formation decline rates demand evermore drilling. Drilling costs increase as more wells per amount of production are completed, raising per barrel costs. Sweet spots are finite as the majors have learned the hard way. They bought into many plays too late. The Middle East is, well, the Middle East. Don’t look for reduced tension in the near future. Do look for OPEC nations to increasingly shift oil for export into oil for local consumption — a residual of the Arab Spring. Business as usual is history. Brazilian, East African, Russian and Arctic production opportunities abound, except that the degrees of difficulty are unclear and uncertain, but are sure to be costly. The high costs and regulatory uncertainties of oil limit global growth and nourish alternative fuel prospects. Oil investors don’t like sore throats emerging from hard to swallow realities. They will want to create a new reality to protect their financial wellbeing.

The costs of carbon have yet to be added onto oil and we know they’re coming. There’s debate over the form of payment, not the reality. Take a look not only at the number of governments backing carbon constraints coming out of this year’s climate meeting at the UN, but, more importantly, count the companies! Count the crowd recently claiming the high ground from Central Park to Midtown in New York and other cities around the world. The oil industry’s low favorability gives it limited public influence. While special-interest money may run out the clock on near-term legislation in the next Congress, for the industry, it not a long term solution. Civil society and political trends are inevitably contrary to the industry’s status quo interests. The rhetoric alone will tax the bronchial capacity of oil and gas leaders; investors will cease shaking hands with infected stocks.

Cash is to oil what gasoline is to the internal combustion engine. Higher upstream costs and more expensive fuels reduce consumer demand and, inevitably, cash flow. Downstream cash can’t make up the difference for higher upstream capital (cash) outlays when consumers drive less or take advantage of increasing availability of lower-cost alternative fuels, despite the BTU and/or mileage disadvantages of alcohol fuels versus oil products.

Finally, when divestment trends start to impact the industry, perhaps initially not directly through actual shifting of resources, but because of the growing perceptions of the risk of stranded assets, opportunity costing equations will begin to hit hard. The value associated with increasing capital costs for oil development will be muted. With ever higher costs, more difficult unconventional production, more challenging resource basins and tighter regulatory scrutiny, along with environmental constraints, existing assets may never get produced. The probable reserve that never makes it to proven becomes ever less valuable with time, perhaps even worthless. Investors don’t like that. Oil price to support such production is unsustainable; the price rises until it crashes; production cannot recover from the collapse because sustainable alternative fuels will have taken increasing market share. To remain competitive, oil may not be able to climb above the $55 – 75 range. This prospect will cause full blown pneumonia for oil companies. Most still do not see it coming. For OPEC countries who are under inconsistent pressures — first to increase exports for needed revenues at home to fund services for an often restive population; second, to reduce exports to provide energy and gasoline products to larger population numbers, it could present real challenges affecting political stability.

Some companies that sense it coming will not wait for the cold symptoms to lodge in their respiratory systems. They will get out in front with natural gas, using an entirely different cost/price structure to displace high cost oil by producing natural gas for fuels, including ethanol, methanol, CNG and LNG. They’ll also embrace biofuels as a sustainable and carbon-reducing alternative to oil products only. In both cases, their cash flows and capital outlays will fund reasonable and rational alternative investments in downstream and midstream infrastructure to produce, distribute and sell alternative fuels, extending their business models and capabilities rather than risking everything on their past model. They’ll choose investor and their own health and economic necessity as the basis of a new business model transforming the mobility industry with fuels competition.

A handful of smart companies will astutely come to grips with their industry’s endemic inability to change their historic focus on oil as their base business. They’ll see diversity as an opportunity to run the race with competitive fuels, and they’ll recognize that oil and gasoline will only be able to sustain their monopoly status at the pump for a relatively short period of time. They will trade one form of steel in the ground for another, bringing the competencies of size, scale and execution to an ever-growing, oil-displacing, alternative fuels industry. In the process, they will simultaneously reduce the size of the oil upstream capital, cash, environmental and stranded asset problems that alienated investors, and, at times, the public, particularly related to emissions and other pollutants.

With a proper health check, after scanning the industry’s economic and environmental horizons, they acknowledge the inevitability of the changing critical role of investors. Their own financial health and economic necessity will redefine the role of oil and change the competitive landscape.

 

John Hofmeister, Former President Shell Oil Company (retired), Founder and CEO Citizens for Affordable Energy, Author of Why We Hate the Oil Companies: Straight Talk from an Energy Insider (Palgrave Macmillan 2010)

Marshall Kaplan, Advisor Fuel Freedom and Merage Foundations, Senior Official in Kennedy and Carter Administrations, Author

U.S., Saudi Arabia, Flags, Oil

Are the United States and Saudi Arabia conspiring to keep oil prices down?

As my colleague Jordan Weissmann wrote Tuesday, there are a number of factors behind the continuing global slide in oil prices, including North American production, increased energy efficiency, Europe’s economic stagnation, and China’s slowing growth. But a big one is Saudi Arabia, which, to the dismay of fellow oil -producing nations, has resisted pressure to cut production in order to stabilize prices.

Ahead of an OPEC meeting in Vienna next week, there are some contradictory theories about why Saudi Arabia is content to keep oil cheap for the time being. One is that the Saudis want to nip the U.S. oil boom in the bud. American shale oil is more expensive to produce and needs high prices to remain competitive. As one analyst put it when the kingdom cut prices for U.S. customers earlier this month, “the Saudis have basically declared war on the U.S. oil producers.”

Read more at: Slate

Ethanol, EPA, Environmental Protection Agency, Oil,

Oil, ethanol groups say EPA delay hurting their industries

U.S. ethanol producers and the oil industry responsible for mixing the renewable fuel into the gasoline supply rarely agree on anything.

But the two foes say the failure of the Environmental Protection Agency to finalize how much ethanol should be mixed into the country’s motor fuel supply in 2014, more than a year after the regulator first issued its proposal, has created uncertainty and hindered the ability of the free market to work.

“The market is kind of frozen right now because the EPA hasn’t responded,” said Bob Greco, downstream director with the American Petroleum Institute, a trade group representing more than 550 oil and natural gas companies. “The EPA, because of the way (the Renewable Fuel Standard) is structured, moves markets by making these decisions. You’ve got billions of dollars of investments threatened.”

In November 2013, the EPA proposed reducing ethanol produced from corn in 2014 to 13.01 billion gallons from 14.4 billion gallons initially required by Congress in the 2007 Renewable Fuel Standard, a law that requires refiners to buy alternative fuels made from corn, soybeans and other products to reduce the country’s dependence on foreign energy.

Read more at: Des Moines Register

Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!