[Video] John Hofmeister, chief executive officer and founder at Citizens for Affordable Energy, and Kevin Book, managing director and co-founder at Clearview Energy partners, discuss the factors causing an over-supply of oil and the impact of falling prices on energy producers and the global economy.
Read more at: Bloomberg
Wow. Over the last few days, the nation has seen the possibilities inherent in a transportation-related energy and environmental policy. No, Washington has not become more functional. It’s still a mess! Happily, Congress is out! (They weren’t doing much.) While they’re still being paid, we can at least turn down the thermostat in both the Senate and House Chambers. No new holidays have been created, and no new articles are being put in the Quarterly that cater to requests from constituents. Leaving town is consistent with one part of the Hippocratic Oath that guides doctors and at least vacations for congressman and women … do no harm!
The light in the energy-policy tunnel, or the canary in the policy mineshaft, results from the seeming collapse of the oil market. The price of Brent crude oil has fallen more than 20 percent since June, and on Friday it rose a little to $86.16 a barrel. The four-month drop in oil prices, caused mostly by an oil glut, falling demand and speculation related to both, likely will continue the recent trend toward lower gas prices at the pump, at least for the next few months. The U.S. average is now near $3.16 a gallon, reflecting a drop of about 15 percent since early summer.
The unseen hand of the marketplace — in this case, the actually relatively transparent hand of the marketplace — may provide a substitute for Congressional inaction concerning the presently complicated and sometimes weak policies that ostensibly protect sensitive global and U.S. land and water from harm. At $82 a barrel, oil producers and their investor colleagues have little incentive to invest heavily in tight shale oil. It just costs too much to get to and take out of the ground (or water). If the negative “opportunity costing” concerning decisions about future exploration and rig development become tougher, folks concerned with the environmental well-being of the Arctic Circle and the Monterrey Shale, etc. may end up smiling. They will see less drilling, fewer rigs, less GHG emissions and less non-GHG pollutants!
Apart from environmental benefits, falling oil prices will cause not-so-friendly and even sometimes-friendly Middle East nations to make difficult choices. They are reflected in the current dialogue within OPEC. Should OPEC and its member states sanction the production of more oil and contribute to the global surplus or lessen oil production targets to secure higher prices?
Both decisions, once made, have high risks. Raising prices by lowering production could lead to less market share and ultimately less revenue. Keeping prices low (and lower if the surplus continues to grow and demand continues to fall) could also mean less revenue and an earlier arrival of the time when production costs are near to, or exceed, returns for hard-to-get-at oil. Some Middle Eastern nations may not have a choice. Easy-to-drill oil is becoming increasingly hard to find, even in the once-productive oil-rich desert, and production costs are increasing, as they are around the world. It will be difficult to keep prices low. Yet if countries raise prices, they lose market share. Perhaps another compelling fact of life that Middle Eastern nations must look at is the increase in domestic needs brought about by the Arab Spring and the yearning for a better life among their citizens. Indeed, in this context, both lower prices and higher prices may limit their competitive abilities and result in declining revenue for national budgets. It will present them with a conundrum. Translated into political realities, countries in the Middle East may have less to spend on social welfare programs, exacerbating tension that already exists in the Middle East.
Low prices for oil, resulting from market variables, could well also provide another important international impact: Russia, already hit by sanctions, faces increased budget constraints because of the fall in oil prices. According to The Wall Street Journal, “Economists say falling oil prices could kill off Russia’s flagging economic growth, forecast at no more than 0.5% this year.” Apparently, some Russian economists see $90 as their economic tipping point.
Short-term projections of U.S. oil production suggest a continued (but more modest) decline of oil imports and dependency. But will U.S. oil surpluses and lower costs transfer into oil independence? No! The oil industry is pushing hard for, and is likely to secure, an increased capacity to expand crude oil exports from the federal government. However, trafficking in oil is, and will remain, a two-way street. Price, as well as profits, will be the determining variable. Imports now contribute about one-third of the oil used in the country. The number will hover around 30 percent at least for the near future.
Who knows? We might wake up one morning to find out from public television that we are selling oil to the oil-needy Chinese, while still buying it from countries in the Middle East and maybe even Russia.
There is another possible scenario (we cannot say probable yet) at least to consider in thinking about oil’s future. Because of the likelihood of increasing economic tension between objectives related to drilling for hard-to-get-at oil and its cost, we may go to sleep one night in the not-too-distant future, after hearing again on public television (of course) that oil companies are moving in a big way into the replacement fuel business and lessening their focus on oil. Assets will be sold and bought, followed by media attention suggesting that a major structural shift is occurring in the oil industry. Let’s anticipate what oil CEOs might say: “It’s tough to make the balance sheets work. Drilling for tight oil, really most of the oil left, is just too damn expensive in light of the uncertainty of prices and demand. While still only a small percentage of the overall fuel market, replacement fuels, including natural gas-based ethanol and renewable fuels, seem to be catching on. Detroit, our earlier partner in crime (not literally, of course) in restricting consumer choices to gasoline, hasn’t helped either, recently. It is producing more and more flex-fuel vehicles. Besides continuing to make money, we would like to get off the most disliked industry lists in America.”
Stranger things have happened!
Things have always been a little easier in Europe when it comes to saving gas and adopting different kinds of vehicles. The distances are shorter, the roads narrower, and the cities built more for the 19th century than the 21st.
Europeans also have very few oil and gas resources, and have long paid gas taxes that would make Americans shudder. Three to four times what we pay in America is the norm in Europe.
Thus, Europeans have always been famous for their small, fuel-sipping cars. Renault was long famous for its Le Cheval (the horse), an-all grey bag of bones that’s barely powerful enough to shuttle people around Paris. The Citroën, Volkswagen and Audi were all developed in Europe. Ford and GM also produced models that were much smaller than their American counterparts. Gas mileage was fantastic — sometimes reaching the mid-40s. A big American car getting 15 miles per gallon and trying to negotiate the streets of Berlin or Madrid often looked like a river barge that had wandered off course.
More Europeans also opt for diesel engines instead of conventional gasoline — 40 percent by the latest count. The overall energy conversion in a diesel engine is over 50 percent and can cut fuel consumption by 40 percent. But diesel fuel is still a fossil fuel, which have a lot of pollution problems and don’t really offer a long-range solution. So, Europeans decided that it’s time to move on to the next generation.
Last week the European Union laid down new rules that will try to promote the implementation of all kinds of alternative means of transportation, making it easier for car buyers to switch to alternative fuels. The goal is to achieve 10 percent alternative vehicles by 2025 over a wide range of technologies, removing the impediments that are currently slowing the adoption of alternatives. If everything works out, tooling around Paris in an electric vehicle within a few years without suffering the slightest range anxiety would become a reality.
By the end of 2015, each of Europe’s 28 member states will be asked to build at least one recharging point per 10 electric vehicles. Since the U.K. is planning to have 1.55 million electric vehicles. That would require at least 155,000 recharging stations, which is a pretty tall order. But members of the commission are confident it can be done. “We can always call on Elon Musk,” said one official.
For compressed natural gas, the goal is to have one refueling station located every 150 kilometers (93 miles). This gives CNG a comfortable margin for range. With liquefied petroleum (LPG) it will be for one refueling station every 400 kilometers (248 miles). These stations can be further apart because they will mainly be used by long-haul trucks travelling the TEN-T Network, a network of road, water and rail transportation that the Europeans have been working on since 2006.
Interestingly, hydrogen refueling doesn’t get much attention beyond a sufficient number of stations for states that are trying to develop them. There is noticeably less enthusiasm for hydrogen-powered vehicles than is expressed for EVs and gas-powered vehicles. All this indicates how the hydrogen car has become a Japanese trend while not arousing much interest in either Europe or America.
At the same time, Europeans are planning very little in the way of ethanol and other biofuels (they also mandate 20 percent ethanol in fuel). Sweden is very advanced when it comes to flex-fuel cars. They have been getting notably nervous about the misconception that biofuels are competing with food resources around the world — Europe does not have its own land resources to grow corn or sugarcane the way it is being done in the United States and Brazil. Europe imports some ethanol from America but it is also now developing large sugar-cane-to-ethanol areas in West Africa.
Siim Kallas, vice president of the European Commission for TEN-T, told the press the new rules are designed to build up a critical mass of in order to whet investor appetites for these new markets. “Alternative fuels are key to improving the security of energy supply, reducing the impact of transport on the environment and boosting EU competitiveness,” he told Business Week. “With these new rules, the EU provides long-awaited legal certainty for companies to start investing, and the possibility for economies of scale.”
Is there any chance that the public is going to take an interest in all this? Well, one poll in Britain found last week that 65 percent would consider buying an alternative fuel car and 19 percent might do it within the next two years. Within a few years they find the infrastructure ready to meet their needs.
Whenever a petroleum analyst writes a sentence that begins: “I can still recall when prices collapsed in 1986 …” you know he’s seen just about everything in the global oil market. Michael Lynch has some sage words for those who are predicting slashed U.S. production (and accompanying job losses) owing to the rapidly falling price of crude oil.
Writing in Forbes, Lynch opines (emphasis added):
“Various arguments are being made now about how expensive oil has become to produce and the manner in which this will support prices, but this is much more valid in the long-term. … It is hard to imagine that a multi-billion dollar deepwater platform would be abandoned because of a six-month price drop.
“Other factors will prevent a decline in production from lower oil prices. Companies with contracts renting rigs won’t just cancel them, laying off employees is a near-last resort, and leases must often be drilled in a certain period to hold them. Abandoning wells also has a cost, and oil price drops that are thought to be brief won’t cause many companies to do that.”
The U.S.-led airstrikes against Islamic State in Iraq and Syria (ISIS) might not have eradicated the extremist group, as President Obama vowed to do. But at least the operation has interrupted the flow of oil money to the militants, according to an analysis in Bloomberg BusinessWeek.
Based on details from an IEA report, the magazine says:
Though the airstrikes have failed to keep Islamic State from advancing in the field, they have apparently succeeded in dismantling its sophisticated oil network, reducing the movement’s ability to make gasoline and diesel for its tanks and trucks and cutting off a vital source of funding. A report from the International Energy Agency in Paris has just estimated that Islamic State controls only about 20,000 barrels of daily oil production, down from about 70,000 as of August. Most of it remains in Iraq.
As BusinessWeek reported in September, at the time, when ISIS had seized oil fields and refineries in swaths of territory in Syria and Iraq, the group was bringing in up to $2 million a day from stolen oil.
The nation is lucky to have Gina McCarthy as the head of the EPA. Her background is exquisite, her intellect is superior and her sensitivity to and understanding of the environmental issues facing America is second to none. She has been a fine EPA Administrator.
Then why am I worried when we have such a surfeit of riches in one individual leader? Long before McCarthy became Administrator, the EPA began working on a new set of guidelines governing the amount and use of ethanol in gasoline sold at the pump. The guidelines, more than likely, were ready in draft form simultaneously with Gina McCarthy’s appointment and the pressure to release them was intense, given earlier promises.
Because the positives and negatives of an increase or decrease in the RFS concerning ethanol use are imprecise, no real precise judgment can be made as to the final numbers, except the admonition, similar to the Hippocratic Oath: they do no harm and, do what the EPA suggests they probably will do, improve the economy, the environment and open fuel choices to the consumer. Sounds simple, but it isn’t! The EPA is considering modification of relatively recently determined RFS.
I understand the position of the oil companies to reduce what are effectively ethanol set asides. They have a financial stake in selling less corn-based ethanol with each gallon of gas, particularly when the content of ethanol rises to E85. Declining gas sales and prices make them eager to secure lower total annual ethanol requirements. Although the data is mixed, I also commiserate with the cattle growers who indicate they have had to pay, at times, higher prices for corn because of ethanol’s reliance on corn. Similarly, I am sensitive to environmentalists who worry that the acreage for corn-based ethanol is eating (excuse the pun) into conservation land and that total greenhouse gas emissions from production to use in vehicles of corn-based ethanol is not, generally, a good deal for the environment. I am not trying to be all things to all groups, but I am trying to weave my way through an intellectual and practical thicket.
The corn farmer’s advocacy of ethanol appears rational from an opportunity-cost standpoint. Corn-based ethanol seems, to them, to support higher prices for corn. They have done well in most recent years. While the facts remain unclear (credible researchers, such as those in the World Bank, have wavered over time on their position), the arguments made by groups and individuals concerned with what they believe is the relationship between corn-based ethanol and food supply should be debated fully. I, also, am inclined to believe those in the security business who feel that increased use of ethanol will reduce our dependency on important oil and lessen the nation’s need to fight wars in part to assure the world and the U.S. a share of global oil supply. Weaning ourselves from oil dependency is national need and priority.
It is tough to judge the efficacy of projections of ethanol sales, because of uncertain economic factors and the constraints put on consumer fuel choices by the oil industry’s almost-monopolistic restrictions at gas stations (just try buying safe, less costly alternative fuels at most gas stations) and federal regulations governing alternative fuel use as well as the sale of conversion kits. There is no free market for fuel.
Responding clearly to the conflicts over the value of corn-based ethanol and the annual total requirements for ethanol is not easy and should suggest the complexity of the involved issues and their presumed relationship to one another. Maybe increased use of corn stover and certainly natural gas-based ethanol for E85 would reduce food for fuel conflicts and lessen possible environmental problems. Nothing is perfect, but the production of ethanol using alternative feedstocks, such as stover and, hopefully soon, natural gas, could make a difference in providing better replacement fuels than just the use of corn based ethanol. Like a Talmudic scholar, I frequently, instead of counting sheep, find myself saying “on one hand, on the other hand” while trying to fall sleep. (I haven’t slept more than three full hours a night since Eisenhower was president.) I end up agreeing with the King in the King and I — “It’s a puzzlement!”
The EPA’s job is a tough one. Its lowering of the total amount of ethanol required to be used with gasoline may or may not have been the right decision. I know the EPA is considering modifying its initial estimates upward. We will have to wait and see what the Agency produces and then take part in a reasonable dialogue as to benefits and costs.
I am a somewhat more concerned about the basis used by the EPA to decide to lower ethanol requirements, at this point in time, than the new rules themselves. The rationale for the amended guidelines will become embedded in rulemaking and decisions could well generate unnecessary policy and constituent conflicts.
The Agency explained its recent decisions, in part, in terms of the absence of infrastructure and the possible harm that higher ethanol blends can do to vehicle engines. “EPA is proposing to adjust the applicable volumes of advanced biofuel and total renewable fuel to address projected availability of qualifying renewable fuels and limitations on the volume of ethanol that can be consumed in gasoline given practical constraints on the supply of higher ethanol blends to the vehicles that can use them and other limits on ethanol blend levels in gasoline (the ethanol blend wall).” Note that for the most part, the EPA does not dwell on environmental, economic or security issues in its basic rationale.
The EPA seems to mix supply and demand in a rather imprecise way. Ethanol is ethanol. Traditional infrastructure (e.g., pipelines) is not readily available now to transport ethanol from corn-based ethanol producers to blenders of gasoline and ethanol. But trains and heavy-duty vehicles are accessible and have provided reasonably efficient pipeline alternatives. Indeed, their availability, assuming modifications for safety concerns, particularly concerning trains, extends strategic options regarding the location of refineries/blenders and storage capacity to lessen leakage of environmentally harmful emissions.
The EPA’s argument for lowering ethanol requirements appears to rest, to a large degree, on a somewhat unconventional definition of supply. As one observer put it, the EPA’s regulations “muddle” the definition of supply with demand. There is an ample supply of ethanol now, indeed, a surplus. The EPA’s decision will likely increase the surplus or reduce the suppliers.
Demand for higher ethanol blends really has not been fairly tested in the analytical prelude to the recently changed regulations. Detroit and its dealers seem unwilling to clearly inform consumers of the government-approved use of blends higher than E15 in the flex-fuel cars that they are now producing and or are committed to producing in the future. Oil company franchise agreements limit replacement fuel pumps at their stations, often to off-center locations…somewhere near the men or women’s bathrooms, if at all. Correspondingly, the EPA’s regulations appear to mute the Agency’s own (and others) positive engine testing on E15 and its approval of E15 and E85 blends, within certain restrictions. Earlier, EPA studies were a bulwark against recent sustained attacks by the oil and, sometimes, the auto industry, as well as their friends on ethanol and its supposed negative affect on engines.
The EPA’s analysis of demand seems further blurred by the fact that if the Agency increased the supply of approved conversion kits, increased numbers of owners of existing vehicles would likely convert from gasoline to less-expensive ethanol-based fuels.
The EPA’s background rationale for the new RFS regulations understandably does not reflect the ability to produce ethanol from natural gas, a fuel in plentiful supply, and a natural gas to ethanol conversion process that may relatively soon be available. To do so would likely require an amendment to the RFS because natural gas is not a renewable fuel. The benefits include lower costs to the consumer, reduced import dependency and likely a decrease in pollutants and emissions. It appears a reasonable approach and provides a reasonable replacement fuel until renewable fuels are ready to compete for prime market time. Natural gas-based ethanol, as well as, as noted earlier, possible use of corn stover, would lessen the intensity of the food vs. fuel debate and the environmentalist concerns.
The EPA has tried hard to develop regulations that secure the public interest and appeal to varied constituencies. I respect its efforts. It’s a complicated task. I remember being asked by the U.S. Department of Housing and Urban Development (HUD) to develop a report on simplifying its regulations for diverse programs. If I remember correctly, my report was over 600 pages long. Sufficiently said!
Bloomberg has an interesting story about one way Israel intends to improve relations with its critics in the Middle East: Enter into deals to sell some of its vast stores of natural gas to neighboring countries.
As The New York Times reports, the plummeting price of crude oil has brought disagreements among OPEC member nations about how to stop the slide. Iran has called for production cuts, which could push prices up, but Saudi Arabia has the most influence.
The U.S. Defense Department has come out with a comprehensive report on the impact of climate change on America’s military. According to The Washington Post’s story on the report, “Drastic weather, rising seas and changing storm patterns could become ‘threat multipliers’ for the United States, vastly complicating security challenges faced by American forces …” Read the full report here.
A story in The Detroit News poses a troubling potential downside to the global drop in oil prices: “… most of the new production [in the U.S., with help from the fracking revolution] only makes economic sense at high prices. That is, it’s expensive to get the oil out of the ground, so if prices fall too much, it will cost more to get it than it’s worth.” That reality could put jobs in peril.
