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(11/04/15 11:31pm)
Within the world of hydrocarbon producing nations, Norway is a both a behemoth and an outlier. It is the world’s seventh largest oil producer and third largest natural gas exporter, with incredible expertise in deep water offshore recovery operations. In this respect, it is often grouped with OPEC member states and other large hydrocarbon-producing nations like Russia and Mexico. Along with most of its fellow hydrocarbon producing nations, Norway has a massive Sovereign Wealth Fund (SWF) that is generated from the benefits of these huge petroleum exports. The fund, called the Government Pension Fund of Norway, is invested in global debt, equity and real estate markets around the world. Revenue for both the fund and state is generated through a combination of taxes, leases, permits and direct ownership in oil and gas companies. However, for all intents and purposes, this is where the similarities between Norway and other oil exporting countries ends.
Norway has developed a mixed, diversified economy with petroleum revenues constituting only 23 percent of national GDP and 30 percent of all state revenues. In comparison, oil production comprises 90 percent of state revenues in Saudi Arabia, 91 percent in Libya and a shocking 97 percent in Iraq. Norway ranks as one of the most open and democratic nations with the highest standard of living in the world. In comparison, many of the world’s oil and gas exporters consistently rank near the bottom of governance and transparency indexes with huge gaps in infrastructure funding and standard of living metrics. Though many of these countries have similar sized and structured SWF’s, they are often rent-seeking and controlled by a small sliver of the population for their own gain.
In fairness, I am making a somewhat unfair comparison between Norway and the rest of the world’s petroleum exporting countries. Norway was relatively late to the hydrocarbon game — production in the Norwegian Continental Shelf did not occur until 1971 — and Oslo already had well established liberal institutions and a strong Northern European civil society. In contrast, most of the world’s oil exporting countries have deep colonial legacies and a recent history of conflict which limits their ability to build the democratic institutions necessary to take advantage of their natural resource wealth.
What is remarkable, though, is not how much more efficiently Norway has used its energy endowment than other oil exporting countries, but rather, how successful Norway has been at maintaining this efficiency. Instead of falling into the classic resource trap or “Dutch Disease” — named after the collapse of the Dutch manufacturing sector following the discovery of natural gas — Norway has used its natural resources to build an incredibly wealthy society for all of its citizens. Though only constituting .07 percent of the world’s population, the $1 trillion Norwegian SWF, technically owned by every citizen, owns one percent of the world’s stocks. This breaks out to be nearly $200,000 for every Norwegian man, woman and child. However, the government can only draw down four percent of the SWF a year, with the rest of the money designed for future generations serving as a counterweight to the predictable collapse of their oil and gas industry. This is an incredible example of what strong governance looks like in conjunction with a system that actively fights the human bias of immediate gratification and pursues long term gain. Norway has entered into a kind of “end of history” status that is a spectacular example of what happens when strong institutions are paired with incredible wealth.
(09/18/15 12:29am)
In November of 2014, Saudi Arabia and the rest of the Organization of the Petroleum Exporting Countries (OPEC) be- gan to wage a price war on American oil producers. Fearing the seemingly inexorable rise of sophisticated and productive North American shale producers, OPEC decided not to temper their own production and instead increased global oil supplies. As supply began to outstrip demand there was a dramatic drop in the price of oil. Once prices hit about $50 a barrel many commentators predicted the quick collapse of American shale operators.
After a full year and a half, the story is still unfolding. American shale producers got leaner and meaner and stayed competitive at $50 a barrel. They cut costs, relied on technological ingenuity and focused on developing only the most efficient and economically viable plays. At the same time, key indicators — such as the number of drilling rigs operating in the large shale basins – are pointing towards a looming slowdown in American oil production. What initially looked like a beatdown from OPEC has turned into a staring contest between American producers and their creditors and OPEC governments and their people.
Most OPEC member states’ economies are wholly dependent on revenues from oil sales. This means that when the price of oil falls below a certain threshold, governments have trouble balancing their budgets. In looking at Middle East OPEC members, for example, Kuwait, at the low end of the spectrum, needs oil at $50 dollars a barrel to balance its budget — at the other end, Libya needs oil to be about $220 a barrel for a balanced budget. Saudi Arabia, the leader within OPEC due to its production capacity, needs oil at just over $100 a barrel to balance its budget. Yet while this stand-off in oil markets has captured the world’s attention, there has also been a quiet and revolutionary development in the distribution of natural gas, which has the potential to rewrite geopolitical trends.
A geological side-effect of the North American shale revolution has been the incredible increase in natural gas production within the United States. The U.S. produces so much natural gas everyday amount that it will soon become a major Liquefied Natural Gas (LNG) exporter.
Unlike global oil markets, the LNG market is much more inflexible and opaque. The current major sellers of LNG have control over the market. Prices are set by producers locking customers into long- term contracts, buyers are prohibited from reselling LNG even if other countries are willing to pay a premium and invariably one if not both parties involved are state-controlled companies, lending a strong political tint to the whole transaction. This is the situation facing the European Union with regards to Russia’s geopolitical maneuvering in the Crimean peninsula.
Behind the surge in U.S natural gas production lies an opportunity to rewire the LNG market. Instead of state con- trolled companies like Russia’s Gazprom or Qatar’s Qatargas dictating market fundamentals, the price of natural gas flow- ing from the U.S will be set by the U.S LNG market — a market that is heavily traded, transparent and allows buyers to resell their LNG if they so choose. As a result of US LNG exports, major buyers of natural gas (especially in Asia where most U.S supply will flow) have the chance to force other suppliers to adopt more trans- parent and flexible pricing strategies. This will only happen if importers band together and force these changes through physical LNG hubs, better markets for trading LNG contracts and increased transportation of natural gas. The U.S can supply the disrupting gas, but it is up to Asian importers to take advantage of the North American shale revolution.
(05/06/15 3:27pm)
It is a bit of a break from the norm for this column to talk about a car company, but on April 30 Tesla Motors unveiled a product that transforms the electric car manufacturer to an energy storage company that has the potential to transform the way energy is used fundamentally. Elon Musk, the CEO of Tesla Motors, revealed a hugely anticipated home battery system called the “Powerwall.” It is a rechargeable lithium-ion battery that can be mounted in a garage, basement or on the outside of a home. The home battery pack is about the size of a small refrigerator and will become available for purchase in 3-4 months with a base model price of $3,000. The battery can either be connected to home solar panels or to the grid itself. Essentially, this allows homeowners who connect it to the grid to store electricity when rates are low. The battery also allows homeowners who have solar systems to take full advantage of peak production throughout the day. The “Powerball” can serve as a backup generator in the event of a blackout. Musk wants to serve the business community as well by offering much larger “Powerpacks” to energy-hungry customers like utilities and tech giants.
These consumer and business-oriented batteries will be produced in Tesla Motors’ “gigafactory” in Nevada where Tesla’s car batteries will also be made once the factory is ready for use. This new product will be handled by a subsidiary of Tesla Motors called Tesla Energy. The goal of Musk is to revolutionize the utility industry by combining this battery technology with the home solar panel installation company called SolarCity, of which he is the chairman. The combination of these two technologies could transform individual homes into mini power plants — buying and selling electricity with the grid in real time. In addition, this battery and solar technology can serve as a substitute for traditional electrical grid infrastructure in parts of the developing world that have not yet been electrified. In his unveiling presentation, Musk compares this battery technology to smartphone technology. Just as cell phones permeated developing markets and there was no longer a need to build-out incredibly expensive land line networks, this battery technology could prevent the need for a build-out of expensive electrical grid infrastructure. However, there are a few minor problems with this potentially disruptive technology that could hinder the development of Tesla Energy.
It is unclear whether or not the price of the “Powerwall” system includes the subsidy given by many states (California, for example, gives rebates of up to 60 percent for home battery purchases). Additionally, in his presentation, Musk failed to mention that the battery packs would require a $2,500 DC-to-AC electricity converter. This allows for your house, which runs on AC current, to convert the DC current of the battery into usable electricity. There is also the cost of installation and maintenance which, when added to the cost of the converter and battery itself, brings the total cost of the “Powerwall” to $6,000 or more based on the model.
Musk’s goal is to radically transform the way the world uses energy on a massive scale. He wants to upend the traditional energy utility system. It would be a remarkable and incredibly lucrative feat to pull this off, but with the combination of SolarCity and Tesla Energy nobody is better positioned to succeed.
(04/08/15 3:43pm)
As this column has emphasized before, global environmental and climate trends will hinge on the emissions of the developing world. Just this month, China’s largest oil refiner, China Petroleum & Chemical Corporation (Sinopec), has indicated to the world that China may reach peak oil and gasoline consumption much quicker than previously predicted by western energy companies and consulting groups. For instance, the esteemed Paris-based International Energy Agency (IEA) has forecasted that China’s oil demand will most likely increase through 2040. This is a massively different time frame than the official predictions by Sinopec. China sees peak diesel consumption in 2017 and peak gasoline consumption within the next 10 years.
These Chinese predictions are a sobering revelation to any oil-bull. The common theme among energy companies is that demand trends in India and China will remain positive for decades to come — supporting global oil markets in the process. This Chinese-Indian demand is essential for stability in the oil market given the very real slowdown in oil consumption from developed nations. Exxon-Mobile, the world’s fourth largest oil company, predicts that from 2010 to 2040, gas and diesel energy needs in the 32 countries of the OECD are projected to fall about 10 percent. However, Exxon believes that these needs are expected to double throughout the rest of the world.
The signs are already evident that these IEA and Exxon predictions may be overly enthusiastic. In China, diesel demand declined last year, and growth in crude oil consumption has shrunk. Crude oil use is projected to rise about three percent this year, less than half the rate of the total economy. These declines in growth rates are symptoms of very powerful forces from within China. For instance, the political leadership in China is trying to transition the economy away from debt-fueled real estate investments and heavy ‘smoke-stack’ industries towards service industries and increased domestic-consumption. This will limit the need for energy-intensive investments and stymie the growth of petroleum use.
Even Sinopec itself, with 30,000 gas stations and 23,000 convenience stores, is prepping for a future in which selling fuels is not its primary business plan. As a microcosm of the Chinese economy, it hopes to rely on the consumption of goods and services at its shops and filling stations. Sinopec Chairman Fu Chengyu is quoted as saying, “In the future, fuels will become a non-core business of Sinopec … petroleum or oil and gas will continue to be a major energy source in the future, but they won’t be the only source; more emphasis will be put on our new energy and alternative energies.”
China is the world’s largest greenhouse gas emitter. As such, the policy decisions made in Beijing will have a greater effect on global climate change than any other unilateral announcements. According to the World Bank, China accounted for roughly 24 percent of global greenhouse gas emissions in 2014. Within the country, roughly 16 percent of greenhouse gases are emitted from the consumption of petroleum products. It appears that through Sinopec’s retail plan, China is signaling that it is committed to meaningful reductions in emissions. However, there can always be more progress and greater efficiency. It will be illuminating to follow China’s path to peak gas and diesel over the next few years.
(01/21/15 11:06pm)
“On Tuesday, January 13, about 45 people gathered in front of Mead Chapel for a ‘rejection rally’ against the Keystone XL pipeline, joining over 130 rejection rallies nationwide. Encouraged by 350.org and 350 Massachusetts, rallies took place all across the country in the wake of Nebraska’s decision to allow the pipeline to pass through.” - The Middlebury Campus, “Students and Vermonters Rally Against - and For - the XL Pipeline,” Jan. 15
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For the last five years, since the commissioning of the Keystone XL pipeline, there has been spirited debate from every imaginable sector of the American public as to the pipelines benefits or lack thereof. As the 114th Congress prepares to push the pipeline through and President Obama threatens to veto any such order, it would appear that the debate is continuing its familiar path. However, one variable in the Keystone XL pipeline debate has changed since the issue came to the forefront of the news cycle: oil prices have undergone a sustained drop in price. So instead of picking an ideological side to the pipeline debate I am going to ask how lower oil prices affect the economic and emissions development of the Keystone XL pipeline.
Informed discussion has mainly revolved around the State Department Supplemental Environmental Impact Statement (SEIS). Though the study concluded that the pipeline would not substantially increase greenhouse gas emissions, there was one major exception to this statement. If oil prices hovered around the $65-$75 a barrel range, then the reduction in transportation costs accrued from the pipeline would tip the economics of Canadian oil production from red to black — thus increasing emissions. Now that oil is currently in the $45-$55 a barrel this point of discussion seems meaningless.
However, it is not the current price of oil that decides whether or not this project makes sense in terms of economics or emissions. It is the long-run price that determines the effect of a pipeline that could be in service for decades. The absolute impact of Keystone XL on both price and emissions depends on how global producers and consumers react to the oil price increase or decrease caused by the pipeline’s completion or lack thereof.
Lower oil prices reduce both the costs and the benefits of approving the Keystone XL pipeline by reducing the odds that it will ever be fully built or used. If prices are kept at their current low level, there is a very small chance that the Keystone XL pipeline will never get built because of the economics. This is highly unlikely though, because if Canadian production does not grow, the chances of sustained low prices decreases. The more realistic possibility is that the pipeline is approved and utilized. In this case, lower oil prices reduce the economic benefits without changing the climate effects of the pipeline.
However, the biggest takeaway from this debate is that both the climate damages and the economic benefits from Keystone XL are small in the grand scheme of climate change and the U.S. and global economies. A Keystone XL decision will not drastically alter the current science behind climate change or drastically affect the U.S economy. The debate says more about how we as a nation feel about the economy and climate change than what the science or economics says about this topic.
(11/19/14 11:57pm)
In my last article, I focused on China’s plan to convert a number of coal-fired power plants to power stations running on synthetic natural gas. The premise of the article was the huge increase in greenhouse gas emissions this shift would create and the apparent indifference of Chinese leadership to climate change and carbon emissions targets. I would therefore be remiss if in this week’s piece I did not dissect the recent, and monumental, U.S-China climate announcement.
As the world’s largest and second largest carbon emitters, China and the United States, respectively, had to come to an agreement on cutting carbon emissions in order to ensure other countries would agree to mandatory cuts in emissions. What this pact ultimately means for emissions, of course, will be determined over many years and is subject to wild variations. However, there are a few major points to take away from the agreement as a whole.
From a big picture standpoint, China’s plan calls for emissions to peak “around” 2030, with a stated intent to attempt to beat this deadline. It also expresses a goal of boosting non-fossil energy to 20 percent of Chinese fuel by 2030. The real question might not be when emissions from China peak but at what level do emissions actually crest. Do they peak at 50 percent above current levels, 25 percent, 5 percent? Due to the sheer size of China’s carbon emissions, that single number makes an enormous difference for global emissions.
On the other hand, the United States promised to set emission levels at 26 percent below 2005 levels by 2025. The proposal includes language that specifies a planned attempt to get to a 28 percent cut by 2030. If the United States hits its current target laid out in previous emissions plans — 17 percent below 2005 levels by 2020 – on the head, it will need to cut emissions by 2.3-2.8 percent annually between 2020 and 2025. This will require a much faster pace of emissions decreases than what is being targeted through 2020. This is an incredibly demanding goal, barring some unforeseen technological breakthroughs. Given that the Obama administration claims that the targets can be met using existing laws, realistically, the goals may not fail legally but politically.
The most interesting takeaway from China’s numbers is that they are original. By this, I mean that in the past China’s emissions targets have been nothing but “business as usual” economic and environment practices. These new numbers signal a concerted shift towards active emissions management and will require China to depart significantly from the path that most analysts have expected Beijing to take. In addition, just the fact that China is announcing climate related goals with the United States is a dramatic shift away from the norm. In the past China has gone out of its way to unilaterally announce these kinds of plans and establish autonomy from the international community. This newfound approach will hopefully lead to a closer and more productive relationship between the world’s two largest economies — a relationship that is imperative if there is to be any meaningful global change.
(10/29/14 8:27pm)
Fifty-four years ago this past September, in 1960, the global cartel known as the Organization of the Petroleum Exporting Countries (OPEC) was founded. Thirteen years later, in 1973, the Arab members of OPEC played their trump card, initiating the ‘Arab Oil Embargo’ in protest to American involvement in the Yom Kippur War. The resulting lack of supply throughout the western world caused the price of oil to leap from three dollars to 12 dollars per barrel throughout the 1970s. More important than this price increase was the newfound global order that placed OPEC at the forefront of global oil production and pricing. This OPEC-centric global order witnessed permanently higher prices. Meeting twice a year in Vienna, Austria, OPEC’s oil ministers set a production quota, deciding to either increase or decrease supply. Though there was always cheating among its members, OPEC has been very effective in keeping prices where they want them to be. Since 2011 the price of oil has remained relatively constant at 100 dollars per barrel. However, just in the past few years there has been increasing speculation that due to America’s own ‘energy revolution,’ the power of OPEC is rapidly declining and might not even survive the next decade in the same capacity.
Since June, the global price of oil has fallen 25 percent, settling at around $80 a barrel this past week. Popular sentiment maintains that seven of the 12 members of OPEC will fail to balance their budgets when oil prices are below $100, and this number only increases as prices fall. The Arab Spring of 2010 and 2011 drove a number of important OPEC members, including Saudi Arabia and the United Arab Emirates, to escalate government spending in order to placate their own populations. These higher budgetary concerns, combined with increasing North American production, have thrown OPEC into seeming disarray. In short, the supply of oil is greater than demand, and it would appear that OPEC has lost its ability to control the supply. In addition, according to industry experts, the costs of finding and producing oil and gas in America will continue to decline. The American energy industry, as a result, might be better suited to weather sustained price drops than OPEC members. Is the end of OPEC upon us? Though this all seems plausible it does not hold up to the reality on the ground.
OPEC as an institution will exist in whatever form Saudi Arabia deems strategically expedient. These ‘break-even’ oil prices of today, which allow OPEC members to balance their budgets, fail to take into account the trillions of dollars in sovereign wealth funds (SWF) many of these countries possess. In many cases these SWF’s deliver more financial income than the oil revenues of their respective countries. Oil prices are low because of increased supply, and this is exactly what the Saudis want. The Saudis might be trying to stimulate the global economy, manage a slowing Chinese economy, grab market share, strategically contain Russia and Iran (an alignment of American interests) or simply curtail renewable energy projects. Whatever the reason behind Saudi Arabia’s decision to maintain a lower global oil price, the takeaway is just that — it is still Saudi Arabia that is setting the price. Just like the peak oil theory, I expect talk of the ‘decline of OPEC’ to be a contentious issue, but for now, OPEC still has a strong leader with strong direction.
(10/08/14 12:44pm)
In a shocking – though not unforeseen – development, China has recently surpassed the European Union in greenhouse gas emissions per capita. This means that on average, each person in China in 2013 produced 7.2 tons of carbon dioxide compared with 6.8 tons in Europe, 16.4 tons in the U.S. and 1.9 tons in India . Though the U.S still leads the world on a per capita emissions basis, China surpassed the U.S. in terms of overall carbon discharge seven years ago and still remains by far the largest producer. However, there seems to be a growing paradigm shift within Beijing. The politburo has realized that the environmental price China has paid for sustained growth has been too large.
The most visible and advertised environmental problem has been poor air quality. International and domestic news agencies have been reporting relentlessly on the sometimes apocalyptic conditions within Beijing, Handan and Jinan, to name a few of the most polluted cities. In 2013, only three of the 74 Chinese cities monitored by the central government met the national standard for “fine (healthy) air.” As is Beijing’s style, there has coalesced a top down plan dubbed in the western media – “China’s War on Pollution.”
Enemy combatant number one for the Chinese government is coal-fired power plants. This seems to be fantastic news as coal is the major source of China’s greenhouse gas emissions and is responsible for at least 67% of China’s seemingly insatiable appetite for energy. However, China does not have enough natural gas to meet its energy needs, its nuclear sector is also relatively small and clean technologies such as wind and solar are still immature and infinitesimal in relation to demand. In response, the Chinese government is set to begin a rapid buildup of coal to gas power plants.
CoalToGas — also known as synthetic natural gas — is created by synthesizing natural gas from the gasification of mined coal. The short term benefits from China’s perspective are obvious. In facilities located far from China’s population centers, Beijing can convert millions of tons a year of dirtier coal into cleaner-burning natural gas, ship this gas cross-country and power local gas plants. In most cases the smog reduction gains are enormous, with gas-fired plants emitting up to 99% fewer local or “criteria” pollutants than coal plants in situ. However, from coal-seam to power generation, synthetic natural gas emits seven times more greenhouse gas emissions than natural gas and the total carbon discharged is up to 82% greater than a regular coal-fired power plant.
Though it may appear to Beijing that shoring up its energy security is priority number one, this undertaking has the potential to become an environmental catastrophe. If China builds the nine approved SNG plants — over the estimated 40-year life — their carbon-dioxide emissions will hit 21 billion tons (China’s total CO2 emissions in 2011 was 7.7 billion tons). There are currently an additional thirty CTG plants up for approval in the coming years. China has clearly prioritized smog reduction over emission reduction targets and fears of global warming. This may be one of the most detrimental and transformative shifts in the energy and environmental world.
(09/10/14 2:01pm)
This past summer has been marked by wild news cycles in the energy industry. From the unleashing of ISIS on the Middle East to the beginning of American crude oil exports, these past three months have witnessed a shakeup in the global energy market. However, throughout all of this, the only constant has been high global oil prices and even higher domestic gasoline prices. With the price at the pump mirroring those record highs of 2008, most Americans do not know where their gasoline comes from. According to a University of Texas poll, 75 percent of people polled think that the majority of American oil imports come from the Middle East. In reality, only a quarter of American imports come from the Middle East, with the lion’s share coming from North and South America. In fact, we imported 1.14 billion barrels of oil from Canada, more than anywhere else.
Before the oil can be used for transportation and industrial needs it has to be refined. Nearly all imported and produced oil is refined in the United States. About 41 percent of the country’s oil capacity is in Texas and the Gulf states, which is why gas prices quickly rise whenever there’s a hurricane in Louisiana. Another 20 percent takes place in Midwestern states and about 18 percent of America’s oil is refined into gasoline along the East Coast.
Though this country imported a staggering 3.869 billion barrels of oil in 2012, this doesn’t even come close to matching the United States’ insatiable appetite for oil. And that’s where the most important fact comes in: 60 percent of the oil that Americans use is produced right here in the United States. Since 2005, a combination of increasing domestic production paired with decreasing consumption has led experts to project that the United States will meet its energy needs by 2020. A major part of this declining demand lies on the transportation side. Federally mandated efficiency standards will reduce the demand for gasoline and diesel even if Americans drive more cars. The U.S. vehicle fleet is projected to grow from 250 million to 305 million by 2025 but federally regulated corporate average fuel economy (CAFE) standards will improve average fuel efficiency from 23 miles per gallon to 40 miles per gallon in this same time frame. This means that United States gasoline demand has the potential to shrink from 8.9 million barrels per day to 4.8 million barrels per day.
However, it is important to remember that the price of oil is based on an interconnected global market. So, even though the United States may produce more oil than it consumes in 2020, the price Americans pay at the pump is still connected to production around the world, from Saudi Arabia to Venezuela. The dramatic increase in U.S production has done and will continue to do wonders to dampen shocks on the supply side, but in the end a stable energy market abroad is just as important to American gasoline prices as production in Texas and North Dakota. As the midterm elections approach it is important to remember that even though catchphrases such as ‘American energy independence’ and ‘self-sufficiency’ will be thrown around, we are more connected to the global energy market than ever before, and the domestic price of gasoline is, in reality, very much a global price.
(04/30/14 10:57pm)
Since 2011 the United States has increased its hydrocarbon production faster than any other country. As mentioned in this column before, this tremendous growth has been driven almost entirely by the combination of two independent drilling technologies, as well as the practices of horizontal drilling and hydraulic fracturing to exploit gas and oil locked within shale rock formations. The economic benefits from increased domestic hydrocarbon production are evident and quantifiable — from lower energy costs, new jobs and the possibility of an American manufacturing renaissance, to a rebalancing of the trade deficit, along with increased GDP growth. However, even as politicians on both sides of the aisle demand to be recognized as fracking’s biggest supporters, a storm of negative public sentiment rooted in environmental concern is growing across the country. In 2010, New York State — which sits atop the Marcellus Shale Formation — placed a moratorium on fracking. In 2013, Boulder and Fort Collins, Colorado placed five-year bans on fracking, and the nearby town of Lafayette, Colo. prevented the drilling of any new oil and gas wells. As the spread of fracking continues, communities from Pennsylvania to North Dakota to Wyoming are questioning the utility of these wells.
It is often claimed that, in balance, the increased production of natural gas and the subsequent conversion from coal-fired power generation to natural gas power generation is beneficial for the environment and helps mitigate climate change. The burning of natural gas reduces air pollutants such as mercury and sulfur dioxide, which cause acid rain, and releases far less carbon-dioxide into the atmosphere. However, due to a lack of regulatory oversight and slow adoption of energy industry “best practices”, this statement lies in the realm of possibility and not truth.
There are four main environmental concerns for the production of natural gas. Throughout all stages of production, methane — a greenhouse gas that during its first 20 years in the atmosphere is 84 times more potent than CO2 — has the possibility to be released into the atmosphere. During the drilling process, chemically-enhanced fracking fluid can contaminate water sources. Drilling sites could also cause local air pollution such as smog, and fracking could possibly lead to increased seismic activity. All four of these concerns are rooted in the real-world experiences of drilling sites around our country. In a research poll conducted in September 2013, 49 percent of respondents opposed fracking, whereas just 44 percent favored it. The energy industry now faces crisis of confidence and needs to change the fundamental facts of natural gas production.
Through a combination of government regulations and the adoption of industry norms such as new emissions controls, better waste-water management practices and increased methane capture efficiency, shale gas production will be cleaner and more efficient. If the energy industry can realize the same magnitude in efficiency gains as they have in production gains going forward, the transition from coal to natural gas will be both environmentally and economically beneficial.
All this being said, shale gas is still a non-renewable resource that releases greenhouse gasses during production and consumption. It is most certainly not a solution to climate change and a warming planet. However, what it can do when implemented in its cleanest possible form, is create a technological bridge from the current hydrocarbon system to the renewable system of the future. The shale revolution gives us the ability to slow down the rate of greenhouse gas emissions while we accelerate the transition to a truly clean energy framework. That is the end goal we should not lose sight of.
(03/19/14 3:08pm)
As the political situation continues to develop in the Crimean peninsula, there have been frenzied calls among American politicians to break Russia’s energy dominance in the region. The principle idea is to leverage the burgeoning North American shale revolution by exporting natural gas to continental Europe and weaken a key facet of Russian power. However, though there is abundant natural gas in North America, the complex export infrastructure in America that is needed to ship liquefied natural gas is still years away from being completed at any meaningful scale. In addition, many of the terminals that are closest to being completed have already inked long-term gas contracts with customers. Even if European politicians wish to flood their markets with cheap American gas — as the ambassadors to the United States from Hungary, Poland, the Czech Republic and Slovakia asked for in a letter to congressional leaders — they would still have to compete with Asian customers who are willing to pay nearly 50 percent more than Europe. Fundamentally, regardless of the political posturing, gas producers would never choose to leave money on the table in order to further American geopolitical aims.
As I talked about in an earlier column, with an eye towards the long-term, the shale revolution has the potential to alter political and economic policies around the world. But with regards to the current circumstances in the Ukraine, America simply cannot help besieged allies by making it easier to export natural gas. This does not mean America has no way to exert influence through global energy markets. There are two separate and specific tools that the U.S. can immediately lean on to disrupt the current status quo in Europe.
The first of these tools is the Strategic Petroleum Reserve (SPR) located in both Louisiana and Texas, which currently holds 696 million barrels of government-owned crude oil. With oil and gas making up more than half of Russia’s budget revenues and a budget that is only balanced when oil remains at $110 a barrel, Moscow is vulnerable to price shocks. By releasing a mere 500,000 barrels a day from the SPR, prices could fall by about $10 and cost the Russian government roughly $40 billion in annual sales. The U.S. government could maintain this for years if it wanted to, and could drop about 4 percent off Russia’s GDP.
The other option is something we are already doing and have been doing for years but is not high on the Obama administration’s agenda nor is it palatable to his counterparts in Europe: cheap, plentiful American coal. As natural gas prices fell in the U.S. and electrical generation began to switch to cleaner, more efficient gas, King Coal lost its leading role in the American electrical generation portfolio. The U.S set a record in 2012 for coal exports – with the majority already going to Europe’s remaining coal-fired power plants. The infrastructure for exporting coal is already in place and, unlike natural gas, coal is not governed by antiquated and complicated U.S. export regulation. The obvious downside to increased coal consumption is that when burned for power it releases roughly twice the amount of greenhouse gas as natural gas does.
As Europe continues to struggle with shifting power structures and long-term questions about their energy security, European leaders cannot rely on these stop-gap measures. In order to reestablish economic competitiveness and continue to set the benchmark for climate change goals, Europe needs to look within its own borders to find the solutions to these problems. However, right now, in this current situation, American and European leaders need to be examining all of their options to see what will have an effect at the negotiating table.
(03/05/14 10:15pm)
The North American energy revolution is poised to reach a loud and disruptive crescendo in 2020 as the United States becomes a net energy exporter. Only five years ago this seemed an impossibility with domestic oil production falling steadily from 1990 until 2008 and LNG terminals gearing up for ever-increasing imports. The effects of this transformation are already felt, from economic gains to diplomatic strength, and “declinist” thought about the United States has a strong adversary as the energy renaissance ushers in a new world energy order.
The American energy transformation has been remarkable in both its scope and speed. By combining two independent drilling technologies, horizontal drilling and hydraulic fracturing, U.S. shale gas production rose by over 50 percent each year from 2007 until 2012. In addition, U.S. crude oil production grew by 50 percent between 2008 and 2013, leading to a string of consecutive increases not seen since the late 1960s, when production in Texas was peaking and Alaskan oil first began to flow. These same production numbers will be hard to repeat in other nations. As a recent Foreign Affairs piece noted, a blend of favorable geography, risk attuned financiers, robust property rights that allow landowners to claim underground resources and a strong entrepreneurial spirit have created a unique American energy environment. Other countries might have the right rocks but few have the correct industry structure.
The first tangible benefits accruing from this increased production are seen at the economic level. The McKinsey Global Institute estimates that by 2020, unconventional oil and gas production could increase the United States’ annual GDP anywhere from two to four percent, or roughly $380–$690 billion, and create up to 1.7 million new permanent jobs. This is in addition to the rebalancing of America’s $720 billion trade deficit, of which roughly half comes from energy imports. The secondary and tertiary economic effects of the shale revolution are seen in the renaissance of American manufacturing. Because the heavy manufacturing of steel, cement and petrochemicals relies on natural gas for its energy feedstock, abundant and cheap U.S gas has lent a competitive advantage to industries that were once thought to be lost forever. With American manufacturing gaining steam, increased investment in construction and services has given a much needed boost to an ever-depreciating infrastructure stock.
On an international level, the end of U.S dependence on foreign energy imports will have geopolitical ripples for years to come. It is important to remember that though the U.S will not be importing energy, the country is still connected to global energy markets. This necessitates the support for current systems of international treaties and the maintenance of safe shipping lanes - while stability in key energy producing regions remains of the utmost importance. A disruption in Iraq, Saudi Arabia or any other major producer will still cause the price citizens pay at the pump to spike.
However, the manner in which America deals with the international community will change. Instead of relying so heavily on the stick of military force, the U.S now has the carrot of energy exportation that will allow us to bolster allies and combat the weight of OPEC and Russian directives. Though North America may not assume OPEC’s role as manager of global energy prices, greater production parity will greatly undercut the strength of nations reliant on hydrocarbon exports.
As cries of America’s decline continue to build, the shale revolution will only compound the U.S. economic recovery and continue to bolster the country’s dominant sources of economic, military and cultural power. When U.S. oil production peaked in 1971 and the Oil Embargo shortly followed, the U.S. positioned energy as a matter of national security. This has led to 40 years of strange alliances, enduring conflicts and counterintuitive objectives. The U.S. is poised to realize the tremendous economic and diplomatic gains associated with energy independence and a new system of American foreign policy that may allow rhetoric to match action.
(02/19/14 9:34pm)
Across the country, 24 states have declared energy emergencies in response to lingering cold blasts that continue to slam the South and Midwest. A propane shortage has caused 14 million Americans to pay nearly double for recent deliveries of the pungent gas. It would appear that the U.S. is in the midst of an energy crisis that challenges the basic heating needs of millions of homes. However, this is merely a blip, a snap-shot, not of a shortage but of the opposite—a global energy boom that has to the potential to fundamentally alter the energy landscape.
The price of a barrel of oil and, by extension, the price of gasoline, relies on two fundamental human constructs: supply and demand and fear. Some analysts are quoted as saying there is roughly a $10-to-$15 risk premium per barrel of oil (approximately ten percent of what you pay at the pump) caused by fear. This fear has been mainly focused on the Middle East. Wars in Libya, Iraq and Syria, protests in the Gulf States, regime change in Egypt, Tunisia and Yemen, and a relentless nuclear program in Iran have created a false sense of normal. However, 2014 shows signs that this reality should be questioned; fears can dissipate, and in the process the price of oil can fall.
On Jan. 20, a temporary agreement to halt aspects of Tehran’s contentious nuclear program went into effect. The deal brokered between Iran and a U.S led coalition released billions of Iran’s sequestered oil revenues in return for a cessation in key nuclear production areas. Iranian oil production could realistically increase to roughly 3.6 million barrels per day (bpd). This would raise exports to 2 million bpd, positively affecting the world’s total production of roughly 75 million bpd. The Iranian energy sector had been robbed and neglected under President Mahmoud Ahmadinejad and with bilateral talks progressing, President Rouhani has the opportunity to revitalize the backbone of the Iranian economy. Iran could once again hold the world’s attention not with its nuclear program, but with its energy industry.
This is a trend that is playing out across the global energy landscape. Iraq, a country torn by invasions and years of sectarian conflict, is watching its production surge. Already the world’s third largest oil exporter, Iraq has the resources and contracts to potentially double production to 6.1 million bpd by 2020 and possibly even reach 8.3 million bpd in 2035. In addition, there is growing hope for a war torn Libya that saw production fall from roughly 1.6 million bpd to zero in 2011. Production then rebounded much quicker than analysts expected and reached 1.5 million bpd in 2013. With the potential for the political, economic and financial system to recover, Libya is well positioned to drive down global prices. Overall, the volatility that has rocked the Middle East for the last decade is situated to recede and bring hope to a whole region.
Most importantly, in the U.S., crude oil production is approaching the previously unthinkable. America has recently passed the historical high of 9.6 million bpd of production. Deep sea plays, hydraulic fracturing and previously uneconomical sources of hydrocarbons are now flowing in the U.S.. The U.S. has recently assumed the title as the world’s leading liquid fuels producer and by 2016 the International Energy Agency (IEA) predicts oil production will surpass Saudi Arabia as number one in the world.
Through a combination of slower economic growth, increased fuel efficiency and electric and hybrid cars, demand for oil in the developed world will continue to decline even as production grows. In combination with a decreased fear premium, the price of oil has a very real potential of settling lower than predicted, and that means lower prices at the pumps.