US Natural Gas Prices and the Election

Every fall my natural gas utility asks if I'd like to lock in my gas price for the next 12 months.  In some respects the timing for this looks ideal.  Commodity natural gas prices haven't been lower than this year's average since 1999.  Gas is also historically cheap relative to other fuels.  Heating oil recently averaged above $4 per gallon, while the fixed price my natural gas provider is offering equates to $1.36 per gallon, including distribution charges.  However, overhanging this relatively simple choice are big uncertainties related to the economy and the potential impact of regulations on shale gas production.  To complicate matters further, both of these uncertainties are entangled with the outcome of the US presidential election, and my gas provider wants my answer by next Monday.

When I last looked at this question in detail, in 2010, I concluded that the utility's offer was attractive, after scrutinizing then-current gas futures prices and the historical relationship between the futures market and "city gate" prices for Virginia, where I live.  Using the same methodology, this year's offer of $0.62/therm ($6.20/MMBTU) looks reasonable.  Much has changed in the interim, though, in ways that undermine the rationale for locking in consumer gas prices.  The biggest benefit of a fixed price is avoiding nasty surprises during winter heating season.  More than four-fifths of my household's gas consumption occurs from November through March, a period when gas prices used to be alarmingly volatile.  

That's less of a concern, now, with US gas inventories high and supply ample. The same shale gas revolution that has increased domestic supply and backed out imports has also reduced volatility and promoted big shifts in demand. Since 2009 residential gas demand has been essentially flat, while demand from commercial and industrial users has grown by 6.5% and consumption in power generation is up by more than 10%, despite a lackluster economy.  (Gas for use in transportation grew even faster but still constitutes less than 0.2% of total gas demand.)  As a result of these shifts, peak monthly average natural gas prices since the winter of 2009-10 have occurred in summer, coinciding with air conditioning demand. With less winter price volatility, the decision to lock in prices now is mainly a bet on gas prices for the next 12 months.  The outcome of that bet hinges on future supply and demand.

On the supply side, will the surge of US shale gas production continue?  New regulations are among the biggest potential constraints on output.  The EPA has set new rules on emissions during well completion and production, with the most expensive aspect phasing in by 2015.  EPA will also issue new rules on wastewater disposal from fracking by 2014. There is growing pressure on the administration to impose federal regulation of most aspects of shale development, superseding management by the states.  Thus far, the White House has avoided a sweeping crackdown that would disrupt gas markets, and the EPA administrator is on record opposing comprehensive federal regulation of all wells.  However, it's not obvious whether such reticence stems from a basic belief in the national importance of this resource or the simple expedient of not killing the golden goose before the election.  Governor Romney has proposed streamlining regulations affecting gas production. Next Tuesday's outcome should resolve this uncertainty.

The other big uncertainty surrounding gas prices concerns demand.  High shale gas output isn't the only reason gas is cheap today.  Anemic GDP growth such as the 2% rate for the third quarter reported last Friday has helped keep gas prices low.  A stronger economy with higher full-time employment would put upward pressure on prices by soaking up much of the surplus production that has depressed them.  However, the consequences of failing to mitigate January's "fiscal cliff"--federal budget "sequestration" and the expiration of many tax cuts--would likely drive natural gas back toward the lows we saw this spring.  With the economy still the number one issue for most voters, its likely future impact on gas demand is linked with our perceptions of the candidates' economic programs and promises. 

My best bet is to convince my supplier to let me wait until after the election to reply.  There's nothing like additional information to improve the value of a decision. Failing that, I'm inclined to pass on this opportunity.  The possibility of cheaper natural gas next year acts as a modest hedge against the risk of another recession, while the benefits of a stronger economy would more than outweigh any natural gas price increases I might experience on the upside.

Read More

Election 2012: Romney on Energy

After last week's review of President Obama's energy record and campaign materials on energy, Governor Romney's energy plans present a sharp contrast. They are based on a fundamentally different view of energy and the economy, relying on markets to allocate capital to the most productive opportunities, rather than on government to guide a mix of public and private investments along specific paths towards designated ends. They also emphasize technologies that are already deployed at scale today, not those still under development or striving to attain scale. Implicitly, the Romney plan prioritizes supplying the energy for a robust economic recovery over programs designed to address long-term environmental challenges like climate change. These positions present voters with a serious and consequential choice on November 6th.

The Romney campaign's website on energy arrays the candidate's ideas mainly in words, rather than with the kind of images and interactive features that dominate the Obama campaign's sites. Energy is the first plank of Governor Romney's five-point "Plan for a Stronger Middle Class", though it requires a little work to explore the details of his energy program. A list of bullet points  is backed up by a lengthy policy paper with numerous references to external sources, but you have to look for it.

The Romney energy plan focuses mainly on oil, gas, coal and nuclear energy, which together meet 91% of current US primary energy demand and which the Department of Energy projects will still provide nearly 90% in 2020 under the policies in place today. You won't find much on his campaign's website about the new renewables that generated electricity equivalent to 2% of our energy use last year, beyond a critique of the administration's investment in Solyndra and a commitment to R&D on new energy technologies.

Among the details of his plan are support for expanded offshore drilling, including areas such as offshore Virginia that were originally in the Obama administration's early-2010 offshore development blueprint, along with a comprehensive assessment of US resources using current technology, rather than further extrapolations based on 1980s technology. Governor Romney proposes expanding energy cooperation with both Canada and Mexico and would approve the entire Keystone XL pipeline. His goal of attaining North American energy independence is aggressive, yet recent analysis by Citigroup puts it within the realm of possibility. It appears to be based on an assessment by Wood Mackenzie, a top-notch energy consultancy, indicating that US oil and natural gas liquids output could expand by 7.6 million barrels per day, with 6.7 million of that coming from federal lands and waters currently off-limits to development. That compares to US net petroleum imports of 8.5 million barrels per day in 2011.

Another aspect of the plan aimed at streamlining the permitting of energy projects could be just as useful for utility-scale renewable energy projects as for oil and gas exploration and production. Regulatory and permitting delays are among the key reasons it takes longer and costs more to develop crucial energy and infrastructure projects here than in many of the countries against which our competitive standing has been slipping. Governor Romney also proposes giving states greater control of permitting on their non-park federal lands. That could substantially increase energy access and output, especially in the west, where the federal government owns over 280 hundred million acres, or 37% of those 11 states, net of tribal lands.

There are also some missing elements. I would have liked to see more about how renewables fit into Governor Romney's vision. He apparently supports the Renewable Fuels Standard but is silent about the increasingly urgent need to reform it. He is on record against the extension of the wind Production Tax Credit (PTC), a 20-year old subsidy roughly equivalent to the current price of natural gas, yet misses the opportunity to explain how all types of energy would be treated under his proposal to reduce corporate income tax rates while broadening the tax base--policy-speak for closing loopholes and eliminating incentives. In last night's debate he said, referring to the $2.8 billion in annual tax incentives for oil and gas identified by the Department of Energy, "... if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive (if) you get that rate down to 25 percent." I'd also like to hear more about how Governor Romney would address greenhouse gas emissions once the economy returns to stronger growth.

Superficially, much of the Romney energy agenda evokes a return to the pre-2008 status quo: heavy on oil, gas and coal, light on renewables, and largely ignoring climate change. I see it from a different perspective: When Barack Obama began running for President in 2007, the US was considered by many to be tapped out on conventional energy, with domestic oil and natural gas production exhibiting signs of deep and permanent decline. In that context it made sense to look beyond those resources to the potential of renewable energy and vehicle electrification, even if the transition involved would be lengthy. That approach also appeared synergistic with reducing greenhouse gas emissions, and a strategy was born. In the meantime, however, it turned out that US oil and gas were far from exhausted, and the most productive new energy technology of this decade wasn't wind, solar or biofuels, but the combination of hydraulic fracturing ("fracking") and horizontal drilling that has unlocked hundreds of trillions of cubic feet of shale gas and tens of billions of barrels of shale oil or "tight oil" resources. Since 2008 the expansion of shale gas drilling has added as much new US energy production as over 250,000 MW of wind turbines or solar panels--8x the wind and solar power added in the same interval. To the surprise of many, the big global energy opportunity of the 20-teens is US hydrocarbons. The Romney plan reflects the unexpected energy transformation we're experiencing.

As in 2008, this blog isn't in the business of endorsing candidates. Energy remains an issue that, like the Cold War, demands bi-partisan cooperation and some level of consistency from one administration or Congress to the next. However, that doesn't prevent me from observing that the energy agendas of the two campaigns are not equally well-suited for a period of serious US fiscal constraints and shrinking federal discretionary expenditures, in which our energy security and economic growth will still depend largely on fossil fuels. In that context, it's highly relevant that the "all of the above" credentials of one candidate depend on oil and gas outcomes that his policies did little to support. Of course, energy isn't the only issue that matters, but then you wouldn't be reading this if you didn't think it was important.

Read More

Candidates & Energy 2012: Obama

It's curious that energy hasn't been as big an issue in this year's presidential campaign as it was in 2008, the year of "Drill, baby, drill."  The price of unleaded regular gasoline has averaged roughly a dime per gallon higher through September than either last year or the same period in 2008, when prices peaked at $4.11 per gallon in July.  Gas prices are higher this year because global oil prices are also higher, with UK Brent crude averaging $15 per barrel over its 2008 full-year average, though without a similar spike.  One explanation for the reduced focus on energy is that President Obama co-opted his opponents' "all of the above" prescription, while indicators such as US crude oil production and natural gas output and prices have been moving in favorable directions.  The Obama campaign and key administration officials routinely draw a strong causal connection between those two facts, forming the basis of their campaign on energy.  But is that claim true?  Like the Washington Post fact checker's assessment of another frequent presidential assertion about energy, a finding of "true but false" seems appropriate.

Although I had intended to provide a side-by-side comparison of President Obama's and Governor Romney's energy agendas, it quickly became obvious that that was impractical, due to length and complexity.  I'll take a look at the challenger's ideas next week.  Since any re-election bid is fundamentally a referendum on the incumbent, it made sense to start with the record of an administration that came into office with an unusually clear and clearly articulated vision on energy, experienced some notable victories and defeats along the way, and ended up embracing a pair of big, emerging trends that it had done virtually nothing to foster. 

That is readily apparent when it comes to oil production, which must be a core element of any "all of the above" approach, since that "all" implicitly includes fossil fuels along with renewables and efficiency.  Go to the Obama campaign web page on energy and you'll see this chart:

It's a rescaled version of the chart below, which appears on the WhiteHouse.gov site on gas prices:

Aside from the fact that changing the axis scale makes the trend look much more dramatic, what's entirely missing from both these charts and the websites where they appear is any cogent explanation of why oil production is rising.  That requires some context about the industry and oil markets that I've overlaid in the following graphs:

Most oil projects big enough to matter aren't accomplished overnight. The process typically involves acquiring onshore or offshore leases, obtaining the necessary permits, conducting exploration activities that only proceed to the next step based on success, planning the required production wells and processing facilities, competing for internal funding against other company projects, obtaining additional permits, constructing facilities and drilling the production wells. Every step takes time.  Depending on the complexity of the project, the overall timeline can span from three to seven years, and that's if no one sues to block the project.  To see why oil production has been rising since 2009, we need to ask what was happening in 2003-6.  The answer is that after many years of being stuck in a range of $20-30 per barrel--with an excursion down to single digits in the late 1990s--oil prices tripled during that period, mainly due to the combination of global economic growth, especially in Asia, and the lagged effect on oil project investments from that late-'90s price crash.  In other words, production went up mainly because five or six years earlier the financial rewards for drilling suddenly got much bigger.

So at a minimum it's a stretch--mere spin--to claim credit for higher production that is attributable to events and perhaps policies on your predecessor's watch.  However, the picture looks worse when we factor in the policies and attitudes that went into effect when this administration took office in early 2009.  Recall that one of the first energy decisions of the new administration was Interior Secretary Salazar's cancellation of previously awarded oil leases in Utah.  Later that year a senior Treasury official--currently chairman of the President's Council of Economic Advisers--testified before Congress that US policies were promoting the "overproduction of US oil and gas", just as the now-touted production surge was starting.  For at least its first several years, the rhetoric and actions of the Obama White House were generally consistent with that view and with Mr. Obama's portrayal of oil and gas as "yesterday's energy" in his 2011 State of the Union address.  The brief offshore drilling opening signaled in spring 2010 was quickly retracted following the Deepwater Horizon accident, with the imposition of a six-month offshore drilling moratorium and subsequent "permitorium". Those responses--justified or not--resulted in Gulf of Mexico production falling by 22% since mid-2010, a decline that has been masked by the tremendous success of "tight oil" exploration and production in Texas and North Dakota. (The time lag for the moratorium's effects was negligible, because the deepwater projects that were halted had already been planned and permitted.)

In fact, the President's adoption of "all of the above" is fairly recent, making headlines following his 2012 State of the Union. It represents quite an evolution from Senator Obama's 2008 emphasis on renewable energy and climate change mitigation. President Obama certainly pursued those agendas with vigor, incorporating billions of dollars of federal grants and loan guarantees for renewables in the 2009 stimulus, backing the Waxman-Markey cap-and-trade bill, and at both the Copenhagen and Cancun UN climate conferences committing the US to significant greenhouse gas reduction targets and further negotiations. 

It hasn't all worked out as planned, though.  Notwithstanding the high-profile bankruptcies of Solyndra--a colossal failure of due diligence by the administration--and other loan guarantee and grant beneficiaries, the output of wind, solar and other non-hydro renewable energy generation has indeed grown by 55% since 2008, increasing from 3.1% to 4.7% of total US electricity generation, equivalent to 1.9% of total energy consumption.  Yet sadly the wind and solar manufacturing sectors that were to have produced so many "green jobs" are caught up in parallel waves of excess global production capacity that could take years--or wrenching consolidation--to work off.  The overcapacity that has blighted the prospects of many of these companies is largely attributable to the generous incentives provided by the US and other governments from Europe to Asia.  Direct wind and solar jobs accounted for just 54,000 of the US "clean economy jobs" tallied by Brookings and Battelle in their study last year, and they look no more secure than non-green jobs.

Climate policy is another area featuring a big disconnect between effort and results. With control of both Houses of Congress, the President backed a climate bill that exhibited all the worst tendencies of that body: 1,092 pages of bloated regulations and carve-outs for favored constituencies.  Even to someone who had supported the idea of cap and trade for a decade, it was a dog's breakfast, configured mainly as a production-inhibiting tax on the US petroleum sector.  Waxman-Markey failed to pass the Senate, and a more bi-partisan bill died in the aftermath of Deepwater Horizon and the recession. Whatever one's views on the science of climate change, costly climate legislation looked like a bad bet in a weak economy.  Actual emissions have fallen, however, as a result not of policy but of another trend that wasn't on the administration's radar screen until it grew too large to ignore: shale gas.  Emissions are at a 20-year low, mainly due to fuel switching from coal to cheap natural gas in the utility sector.

Another key trend cited as evidence of the effectiveness of the administration's energy policies is the reduction of oil imports that has occurred since 2008.  Yet like the facts on oil production, the causes are only tenuously connected to those policies.  From 2008-11, US net petroleum imports fell by 2.6 million bbl/day (MBD), including refined products.  That goes a long way toward achieving then-candidate Obama's goal of reducing imports by an amount equivalent to what the US imported from the Middle East and Venezuela.  However, the biggest contributor to this reduction was the 1.1 MBD increase in total US petroleum production (including natural gas liquids), followed by a 0.6 MBD drop in demand that had more to do with reduced driving and the weak economy than the early gains from tougher fuel economy rules. Increasing biofuel production associated with the 2007 Renewable Fuel Standard contributed another 0.3 MBD, although that policy now stands in urgent need of reform.

I have watched many elections in my life, and I can't honestly say I'm surprised to see an administration running on something other than its actual energy record, which in this case includes positives such as funding ARPA-E's potentially transformational energy R&D and having enough sense to keep largely out of the way of the shale gas revolution--at least for now. Yet having focused 90% of its efforts on a set of technologies that look important for the future but will still meet less than 10% of our energy needs for some time to come, they have now hitched their electoral wagon to an oil production surge that they didn't help and partly hindered.  I can only imagine that this would be deeply disappointing to those who supported Mr. Obama in 2008 because of his vision for alternative energy and the environment.  Nor does it provide much comfort to those who found large portions of that agenda ill-considered or premature. The President's 11th-hour conversion to "all of the above" creates great uncertainty about the course he would pursue with regard to energy for the next four years, if reelected. 

Read More