Never mind that oil prices are set by global commodity markets and keep supply and demand in balance using price movement to restore equilibrium—a process as old as time. The more it costs the less we use and price comes down to clear the market demand.
Investigations were announced and months from now when commodity prices fall again the panel investigating will report they found no basis for market price manipulation.
“The House is expected to consider a bill soon that would offer $5 billion in tax credits to the natural gas industry, a proposal that is causing a split among conservative members and groups.
The bill, called The New Alternative Transportation to Give Americans Solutions, or NAT GAS Act, would provide a generous tax credit to transportation companies that buy a vehicle that runs on natural gas. The measure has 180 bipartisan co-sponsors, including many of the chamber’s most conservative Republican members.
But some are crying foul over the special treatment that the government would be providing to the natural gas industry, arguing that it is not Washington’s role to “choose winners and losers” by offering tax credits to promote one energy industry over another. The bill’s proponents, however, say promoting natural gas — a plentiful resource in the sent a letter to members of Congress in March urging them to avoid new subsidies and tax credits, and they plan to blast anyone — especially Republicans — who do.”— will help wean the country off foreign oil, provide resources to alternative energy sources and increase the nation’s energy security. A coalition of nearly two dozen free-market and conservative groups
What are they thinking?
There is an energy revolution going on in the United States right now and it is being led by the amazing success of unconventional oil and natural gas exploration and development. Even the US Energy information Administration called unconventional oil and gas a “game changer”. US domestic supply of oil and gas is actually going UP despite the best efforts of the Administration to stall or kill-off deep water drilling in the Gulf of Mexico and anywhere else in the country. Meanwhile, President Obama goes to Brazil and announces the US wants to be a ‘customer’ of new Brazilian deep water oil output. DUH!
The oil and gas industry does not need a new Federal subsidy—it needs for the government to get out of the way and let the revolution happen!
I could almost turn into a Ron Paul supporter over issues like this. Let’s hope nothing comes of this.
America’s failed “industrial policy” of picking winners and losers among fuels, technology and companies is undermining our national security making us weaker and more vulnerable to unreliable but politically correct choices. It is driving up our costs and weakening our competitive advantage.
Once upon a time we had markets for the purpose of forcing business to actually compete for customers, compete to reduce costs and increase quality. Today the core competency of many firms is the hiring and managing of K Street lobbyists.
For the record, I favor the elimination of the subsidies for oil and gas companies. I also favor eliminating those for ethanol, for wind, for solar and coal and nuclear all replaced by a level playing field where ‘least cost, best fit’ is the Darwinian industrial policy and the role of government is to create a level playing field where all can compete.
If our environmental strategy would strike a reasonable balance between protecting our environment with clean air and water, reasonable habitat protections and mitigation of damage while simultaneously balancing those environmental interests with our compelling national interest in economic growth and development and a thriving industrial base creating jobs—my forecast is we’d see the clean energy economy take off.
And if we would change the tax code to make repatriating earnings and investing in America more attractive than keeping investment, manufacturing and earnings off shore our economy would keep growing here at home rather than in China or Far-off-istan!
There ends the rant.
- Democrats Shift Gears on Oil Company Tax Breaks (blogs.wsj.com)
- At Indiana factory, Obama calls for ending tax subsidies for big oil (dailykos.com)
- Oil Company “Subsidies” Clarified (hotair.com)
- It’s Time to Kill Permanent Energy Subsidies (fastcompany.com)
- The Facts Behind Oil and Gas “Subsidies” (powerlineblog.com)
- Natural Gas Cars: Let the Market Decide – Romina Boccia – Townhall Conservative (gds44.wordpress.com)
- America’s E&P Mojo is Back! (civicchoices.wordpress.com)
The growth of unconventional oil and gas in North America in recent years is an energy success story. In 2009, North Dakota edged out Louisiana to claim bragging rights as the fourth ranking oil producing state.
Lynn Helms, Director of the state Department of Mineral Resources, reported in his April 2010 newsletter that if sweet crude oil prices hold at current levels North Dakota could produce 350,000 barrels of oil a day by late 2011. That level of production would be nearly double the production which previously was limited by the lack of export facilities to get the oil and gas to market. February 2010 results showed record production of 261,000 barrels per day. Natural gas production also hit record levels at 280,589 MCF/day.
Investors see the potential for unconventional oil and gas and have pumped capital into expanding North Dakota’s shipping capacity from 189,000 barrels per day to nearly 400,000 barrels per day. This is enough to handle the expected production growth for the next two years.
A Sweet Spot in America’s Economic Growth
This is one reason unemployment in North Dakota is the lowest of any state. Every $1 increase in the price of oil brings the State $9.3 million in additional tax revenue and that multiplier effect of spending from workers, capital investment in equipment and the growth in earnings. The Bismarck Tribune reported that the spread between North Dakota Sweet Crude and the NY MERC price had closed to within ten percent. Before the infrastructure improvements expanding shipping capacity that spread had been as much as twenty-eight percent keeping North Dakota Crude prices depressed.
While the Nation debates health care reform that is expected to raise health care costs, stimulus spending expected to raise taxes, and deficits expected to raise inflation, a quiet revolution is going on in places like North Dakota exploiting new technology and competitive energy markets to reduce America’s dependence on imported oil and natural gas. Every day North Dakota saves America $22 million in imported oil wealth transfer (at today’s average crude price of $82.98).
The good news is that what is happening in North Dakota is spreading to other parts of the country from the Rockies to Pennsylvania, from North Dakota to Texas putting America’s technology to work solving America’s energy problems.
This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
While our politicians stimulate smart grid and renewable energy until we tingle, debate about global warming and dream up subsidies of every type to revolutionize the energy business for the future, a funny thing is happening in the energy industry right here at home. We are re-inventing the energy business the old fashioned way—-by just doing it!
Three things drive this renewal of America’s energy future:
- Advanced technology including horizontal drilling and other E&P solutions to improve productive capacity, performance and overall potential of oil, gas and power resources right here at home.
- Investment realities are driving major oil & gas firms and a score of smaller, faster, more nimble competitors to use technology to go after real opportunities instead of depending upon gigantic plays in distant places of questionable political reliability.
- Untapped domestic opportunities are proving to be just as powerful a source of growth as chasing illusive foreign investment. In a world economy turned upside down doing business close to home, in stable markets, under the rule of law, where economics matter is proving attractive.
The result is the spectacular growth in unconventional gas in the US which is not only turning global markets and would-be energy monopolists upside down, but dramatically improving America’s energy security, energy reliability and our economy.
Don’t believe me?
The US Energy information Agency reports that over the last three years the United States has surpassed Russia as the global leader in producing natural gas. This is driven entirely by the growth in production from shales using American developed horizontal drilling, hydraulic fracturing and other techniques to unlock oil and gas from previously uneconomic plays. All across America E&P companies are bring new supplies of natural gas and domestic oil to market.
More exploration and geological analysis suggests that the potential for unconventional gas is substantial—very substantial and wide spread. Only a few years ago growth in demand for natural gas was a big problem because that demand threatened to turn the US gas market from a domestic market into a global one creating the same dependence on imported liquefied natural gas to meet demand as we have for oil imports. This risk of energy imbalance represented one of America’s greatest strategic threats.
Today in a few short years, without major government intervention—except staying out of the way, our energy economy and energy future is dramatically different—for the better.
Now consider Europe by comparison.
Collaboration between Germany and Russia and acquiescence by the rest of the EU has quickly lead to a situation where Europe is increasingly dependent upon imported Russian natural gas to meet its winter heating and industrial requirements. So in 2006 when Russia shuts off gas to Ukraine in a pricing dispute after Ukraine objected to a 400% increase in prices, the impacts were felt across much of Europe and served as a wake up call.
Russia offered to buy virtually all the exportable gas from Libya, Europe’s only logical alternative to Russian gas and has opposed pipeline construction projects it does not control to serve EU markets.
EU has been working overtime to build renewable energy projects to reduce its energy dependence but it requires hundreds of projects and deep subsidies to make a significant difference in that dependence. In a recent story in the UK, Gazprom Chairman Alexander Medvedev said the UK should be more “pragmatic” saying it would be impossible to meet the UK’s greenhouse emission reduction targets of getting one-third of its electricity from renewables by 2020 without gas. Medvedev may be closer to right than most Europeans want to hear when he says it will be one-third the cost to meet emission reduction goals if the UK just replaces its dirty coal plants with new gas plants rather than wind energy.
So we have the perfect lab experiment at work and we can see what the empirical results will be. Already, the Europeans are hitting bumps in the road with the failure of their feed-in-tariff regimes in Spain and Germany causing substantial disruption of their solar PV markets. Wind production in the EU is moving ahead and the EU will be the global leader in offshore wind production if it achieves its targets. But will it be enough?
Expanding clean and renewable energy use to reduce greenhouse gas emissions is an important part of a responsible, sustainable energy future for every market. But a rapid transition from coal baseload is a daunting challenge and it has a very high cost. And important as environmental sustainability is to our energy future, it is not the only strategic interest that must be protected.
Equally important is energy security and the avoidance of energy extortion that has plagued customer relationships with Russia. It is not as if the EU does not know this is a problem, but it is very difficult to escape the embrace of the Russian bear once he squeezes you.
For the US, the growth in unconventional natural gas is a change in energy dynamics that is revolutionizing our energy outlook and dramatically improving our energy security and economics.
The biggest risks for unconventional gas are not technical or market risks—they are political risks that the Congress and Administration will slap new taxes on domestic energy production that have a chilling effect on capital investment. If the domestic energy markets are left to work based upon the competitive laws of supply and demand, America is coming back strong.
After the collapse of the COP15 treaty prospects, proponents of curbs on emissions are scrambling to find Plan B. It is not an easy thing to do. In the US the best prospect to breathe life back in the emission reduction campaign, the Waxman-Markey cap and trade bill, is dying a slow death in Congress where fears about another hit on the economy in the face of persistent 10% unemployment has sent members running to the exits.
Carbon Allowance Prices Fall
Meanwhile, in carbon markets in Europe and the US carbon credit prices are plummeting and with them hope that cap and trade will provide the incentive for significant reductions. EUA (European carbon allowance) futures ended 2009 at 12.53 euros/tonne, down 21 percent from 2008 closing prices as reported by Reuters. The Regional Greenhouse Gas Initiative covering the Northeastern states held an auction for CO2 allowances and the price came in at a little over $2.00 per tonne.
On voluntary carbon markets, where allowances are traded based upon bets about demand for them in the future prospects for passage of Waxman-Markey were not good and futures prices for allowances fell. 2010 vintage carbon futures on the Chicago Climate Exchange fell from $1.65/tonne to only $0.15/tonne in 2009. Reuters reported that 2009 volumes for voluntary carbon offsets were 40-50 percent below 2008 volumes, and demand fell substantially in December, which is usually a busy month is that market.
Going into 2010 the futures markets in allowances was horrible. European industrial firms were busy estimating their emissions output for 2010 in order to sell excess EUAs early while prices were higher than forecast for later in 2010. Not a good sign for the allowance market or policy makers who expect dumping EUA early will lead to even lower prices later in 2010.
The Ticking Time Bomb in Cap n’ Trade Models
That allowance price problem was the context for the questions put to Dr Severin Borenstein, Director of the UC-Berkeley Energy Institute. Severin is a very smart, very savvy guy who has been at the front lines of energy research long enough to know a few things about policy analysis. Speaking recently at a meeting of private equity players focused on the clean tech and energy space he commented on allowance prices and whether cap and trade legislation could revive prospects for effective green house gas emissions reduction policies.
“There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels. Analysis to date hasn’t focused on resource price change in response to cap and trade – resource scarcity and price changes are likely to be central,” he said. 
He went on to say that he felt that it would require a carbon allowance price of between $80 and $100 per tonne to displace coal. Achieving significant reductions in greenhouse gas emissions needed to focus on that coal displacement goal or market participants would simply pay a lower carbon tax and make only modest changes in their behaviors.
Coincidentally, this is almost exactly what the California Energy Commission and California Public Utilities Commission said in their implementation report on AB32 the California Global Warming Solutions Act to the California Legislature. In short, these state agencies charged with implementing GHG emissions reduction concluded that natural gas prices would need to be $13.87 or higher per MMBtu and the applicable carbon tax would have to be $100 per tonne or higher for the program to be effective in achieving its goals for emissions reduction.
The BIG PROBLEM Waxman-Markey supporters and environmental advocates face is to get their policy goal implemented they must raise gas prices and carbon taxes so high it will crater the economy and keep them there long enough to drive a stake through the heart of the coal industry once and for all so it cannot be resurrected.
If you think the greenmail price was high for a vote for ObamaCare in Nebraska and Louisiana wait until you see what it will cost to buy off enough politicians to get 60 votes for this cap and trade program in an election year.
And if Waxman-Markey cannot find 60 votes, then Plan B logically would be to unleash US EPA with its endangerment finding to wreak havoc on the coal and utility industries. The problem with such blunt instruments of torture as regulations is that a lot of unintended consequences can happen along the way.
US DOE’s Short Term Energy Outlook (STEO) is out. Not surprisingly, total U.S. electricity consumption was down 4.4% in the first half of 2009 compared to 2008, because of the impact of the recession on industrial electricity sales—we made less stuff!
As a result, carbon dioxide (CO2) emissions from fossil fuels are down by 6.0% in 2009 (U.S. Carbon Dioxide Emissions Growth Chart). This is the second year in a row that CO2 emissions have fallen in the US. But as the economy recovers and natural gas prices rise, the Department expects 0.9-percent increase in CO2 emissions in 2010.
US DOE said CO2 emissions from coal-fired power plants fell almost 10% because low natural gas prices encouraged fuel switching. EIA projects monthly Henry Hub natural gas spot price will average $2.32 per thousand cubic feet (Mcf) in October 2009, the lowest monthly average spot price since September 2001. And, as you might expect, such low gas prices are causing new record highs at the end of this year’s injection season (October 31) to more than 3.8 trillion cubic feet (Tcf) in an effort to lock in the cost savings ahead of the expected rise in natural gas prices. The STEO projects Henry Hub annual average spot price to rise from $3.65 per Mcf in 2009 to $4.78 in 2010 but how much it will go up depends upon the fuel demand for power generation and the pleasantly surprising continued growth of U.S. natural gas production from unconventional gas sources like shale formations.
Lower fuels costs should result in lower electricity retail prices year-over-year for the first time since early 2003 with the STEO projecting annual average 2010 residential electricity price of 11.4 cents /kWh or about 2% lower than the 2009 average.
Other factors helping to reduce both fuel consumption and emissions include the addition of 102 wind farms totaling 8,400 MW with another 300,000 megawatts of wind projects are proposed.  Solar projects also grew rapidly but the solar industry hit a financing speed bump during the recession because of limits on capital access.
While the growth in renewable energy capacity was impressive, don’t forget that those 8400 of wind capacity that came on line are the equivalent of only 8 typical sized coal plants. And that represents the biggest challenge to renewable energy today. Can we scale the additional of renewable energy sufficiently—and cost effectively enough—to continue the emission reduction process without more onerous government mandates?
But remember, our insurance policy is natural gas combined cycle generation along with the growing supply of domestic gas from unconventional sources.
If the US is truly serious about reducing greenhouse gas emissions, it can be accomplished by the continued growth in renewable energy. But we also need to see growth in construction of baseload nuclear power and the use of natural gas fired combined cycle generation to reduce the market share of coal in the overall fuel mix.
Waxman-Markey is primarily driven by imposing a political solution to a market economics problem. It is industrial policy of the worst kind locking the US into a rigid Washington-driven formula rather than letting the market adapt to changing conditions with a fuel mix and technology mix that works.