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

Are Films the Answer to Understanding Energy's Complexities?

The issues and choices surrounding our use of energy have rarely been more complex than today, yet our main channels for information about them are discouragingly shallow.  The web is often more effective at spreading misperceptions than fact-based analysis.  When our visual media focus on energy, it's usually to flash bad news before flitting on to the next story, leaving behind images of burning oil platforms or blacked-out cities.  One bright spot is the recent wave of documentary films on energy topics.  Films engage us on a deeper level, and the energy challenges we face deserve such longer-form treatment. August seems like a perfect time to suggest a few of them to you.  If you're reading this blog, then I'm betting you might at least consider watching a movie about energy instead of the latest summer blockbuster.   

Although it was hardly the first serious film about energy, the recent trend seemed to start with "Gasland". For all its inaccuracies, which have been documented by groups outside industry, that film helped start a national conversation about the right way to develop the enormous unconventional oil and gas resources that new combinations of technology have unlocked. In the spirit of making that dialog more constructive and even-handed, you should also know about two other documentaries covering the same topic and region from a different angle.  To many of the farmers and other landowners in depressed counties of New York and Pennsylvania, fracking is not a curse but an actual or potential lifeline. Seeing "Truthland" and "Empire State Divide" might not convert fracking skeptics into gas industry supporters, but it should at least fill in some of the gaps left by the "Gasland's" starkly one-sided portrayal of shale gas.

Another energy film I recently ran across, "spOILed", offers a timely reminder that despite oil's many problems it remains an essential ingredient of our global civilization, providing affordable mobility and a host of products that have made our lives much easier than those of our ancestors--or of people in countries that still lack reliable access to energy.  "spOILed" is also very much a movie about the dangers of Peak Oil, which envisions a world in which declining oil production, rising demand in developing countries, and geopolitical risks create persistent and growing shortages of oil.  This is particularly sobering when combined with a sense of just how challenging it will be to obtain the services that oil now provides from other energy sources.   Unfortunately, the film's message was undermined by occasionally jarring choices of visuals, some hyperbolic claims--no indoor plumbing without oil?--and by political overtones that might limit its effectiveness with the wider audience it appears to target. 

The energy film project that I'm most excited about is one aimed consciously at finding and cultivating "The Rational Middle" in the energy debate.  According to its director, Gregory Kallenberg, it started with a TED talk following his previous film, "Haynesville", which examined the impact of shale gas in Northern Louisiana.  As I understand it, the current project consists of 10 short videos on energy, four of which have been released on the group's website so far.  From the episodes I've seen, Mr. Kallenberg's team assembled an impressive group of experts, including Amy Myers Jaffe of the Baker Institute at Rice University, Michael Levi of the Council on Foreign Relations, former Energy Information Agency Administrator Richard Newell, and Dr. Michael Webber of the University of Texas. The series is being launched with a road show featuring panels of some of the same experts interviewed in the films, starting with a session at this year's Aspen Ideas Festival.  The films are focused on information and process, rather than on selling one point of view. Aside from a few assertions in a couple of interviews, the factual presentation in the initial videos was very sound.  I expect to have more to say about The Rational Middle as additional episodes become available. 

If the we are to develop effective energy policies for the 21st century, the public's desire for clean, secure, reliable and affordable energy must be grounded in facts and figures that help us to differentiate realistic expectations from wish fulfilment.   I'm encouraged that a growing number of filmmakers seems willing to explore energy issues in the depth they deserve, with production values that will connect with today's audiences, rather than turning them off. Enjoy!

Read More

Should the US Become An Oil Exporter, Again?

Last week I missed attending a fascinating panel on the growth of US oil production, hosted by  the New America Foundation in Washington, D.C. Fortunately, I was able to catch most of the live webcast, which is still available for replay. Much of the discussion focused on the potential of new "tight oil" production techniques, similar to those used to extract shale gas, to help usher in a new period of relative oil abundance.  If this comes to pass, among other things it could challenge long-established views about exporting US oil.  The politics of oil exports look absolutely dire at the moment, but the economic and logistical benefits--not just for oil companies but to the nation--are such that we shouldn't dismiss the possibility lightly.

Two hours was not enough time to do justice to all the ramifications of resurgent US oil production, and I know from following the Twitter feed for the event that some in the web audience were frustrated by the limited attention given to the climate implications of these developments.  However, if you'd like an overview of the possible economic and geopolitical impact of the US becoming more self-sufficient in petroleum for at least the next decade or two, this stellar panel was highly informative and worth your time.  Much of the discussion focused on tight oil, liquid hydrocarbons trapped in rocks that can't be economically tapped by conventional drilling, but that have proved susceptible to combinations of horizontal drilling and hydraulic fracturing similar to those that have unleashed the current shale gas boom. Although the full potential of this resource hasn't been reflected in the latest forecasts from the Energy Information Agency (EIA) of the US Department of Energy, the results from the Bakken shale in the Dakotas and the Eagle Ford shale in Texas are instructive.  Together these two fields now produce around 750,000 barrels per day, or 12% of current US crude oil output, up from just a trickle a few years ago.  They also hold billions, and possibly tens of billions of barrels of recoverable resources.

I was a little surprised that the first panelist to mention the possibility of exporting some of this oil--with appropriate caveats--was Adam Sieminski, the newly confirmed EIA Administrator. After all, current US law restricts the export of most US crude oil production, with special exceptions for some oil from Alaska, California, and near the Canadian border.  In practice, crude exports from those fields have declined to very low levels.  Despite that, and even after significant reductions in imports since the onset of the recession, the US is still a major net oil importer.  If that's the case, and if US refineries can benefit from the increasing domestic output, why would we even consider exporting any of this new oil?

Unfortunately, the answer doesn't reduce to a neat soundbite; it depends on two key factors that require a bit of explanation.  The first issue is the quality of the oil coming out of these tight oil plays, which at least so far has been very high. Oil from different fields varies as much as fingerprints, even when we consider only a few characteristics of concern to refiners, and these differences strongly influence the market values of the various grades of oil.  Light crudes refine easily into valuable products like gasoline, diesel and jet fuel, while heavier crudes require more processing, using more expensive hardware, and often yield large quantities of low-value products like petroleum coke, even after intensive refining. There's also sulfur content--the sweet to sour spectrum that overlays the light/heavy distinctions--as well as other impurities.  Eagle Ford crude is light and sweet, as is the North Dakota Sweet crude produced from the Bakken. These crudes compare favorably with West Texas Intermediate (WTI), Brent and other premium crude streams.

The second, related factor involves the complexity of US oil refineries and the crude diet they've evolved to run. As production of high quality crudes in the continental US declined over the last four decades, many refiners invested billions of dollars to enable their facilities to run some of the heaviest, most sour crudes from around the world, because these were more readily available and usually significantly cheaper than the light sweet crudes.  This trend was particularly evident on the West Coast and Gulf Coast. The addition of complex processing hardware like hydrocrackers, delayed or fluid cokers, and residuum fluid catalytic crackers has given these refineries tremendous flexibility, but it also increased their operating costs and made it harder for them to go back to a diet of much lighter crudes.  As a result, while many of them could handle significant quantities of light crude from the tight oil fields, this would be less than optimal, resulting in economic penalties and perhaps eroding the advantages that have recently enabled gulf coast refiners to capitalize on export markets for their products. Those penalties would translate into discounts for the tight oil grades, compared to similar international crudes, much like the large gap in value we currently see for WTI compared to Brent, though for different reasons as discussed previously.

At current production levels, the mismatch of quality and capabilities isn't as big a problem as the lack of infrastructure for transporting these crudes to market.  That has resulted in discounts so large that it makes sense for private equity firm Carlyle to plan to ship large quantities of Bakken crude by rail from North Dakota to the Philadelphia refinery they've just acquired from Sunoco.  However, if tight oil output grows in line with forecasts such as those in a recent analysis from Citibank, domestic sweet crude refiners will have more than enough supply and the excess must either be sold to heavy crude refineries at a discount or left in the ground.  That's where exports come in. 

The last time exporting domestic crude became a big issue was in the late 1980s, when output from Alaska's North Slope (ANS) field reached peak levels of roughly 2 million barrels per day, far more than west coast refineries could absorb. I was trading crude on the West Coast at the time, and I observed first-hand the effects of the export restrictions that had been put in place when the Trans Alaska Pipeline was originally approved.  Those restrictions didn't just depress the price of ANS crude; they also depressed the price of the California crudes with which ANS competed, and made both types less attractive to produce. West coast consumers benefited from a few years of lower gasoline prices than they would have otherwise paid, but the net result was less industry investment and probably higher oil imports in the long run.  By the time ANS exports were finally approved in 1996, the field was already in decline and the biggest opportunity had been missed. 

The advantages of allowing a portion of these new tight-oil streams to be exported would derive from the difference between the global market premium for crude of this quality and the typical discount paid for the lower-quality crudes that gulf coast refiners would continue to import in order to optimize their product yields and costs.  A difference of just $5 per barrel across a million barrels per day of exports would translate into a nearly $2 billion per year improvement in the US trade balance.  The benefits might also include higher tax revenues and royalties if exports supported higher production.  The biggest drawback I see is that in the event of a global supply disruption, some domestic crude would be committed to non-US buyers, reducing our emergency cushion.  However, that problem might be circumvented by requiring exporters to include provisions in their contracts allowing them to suspend deliveries whenever the US government released oil from the Strategic Petroleum Reserve, or a similar contingency.

Perhaps the best summary of the benefits that US oil exports could provide was given by President Clinton, when he authorized exports from the Alaskan North Slope: "Permitting this oil to move freely in international commerce will contribute to economic growth, reduce dependence on imported oil and create new jobs for American workers."  It's probably premature to provide a similar exemption for tight oil now, but it's certainly not too soon to start the national debate that should precede such a decision.

Read More

Could Oil's Surge Sink Renewable Energy?

A new forecast of global oil production by the end of the decade attracted a fair amount of attention this week.  The study, from Harvard's Kennedy School of Government, indicates that oil production could expand by about 20% by 2020 from current levels.  The Wall St. Journal's Heard on the Street column cited this in support of the view that the influence of "peak oil" on the market has itself peaked and fallen into decline.  I was particularly intrigued by a scenario suggested in MIT's Technology Review that this wave of new oil supplies could trigger an oil price collapse similar to the one in the mid-1980s that helped roll back the renewable energy programs that were started during the oil crises of the 1970s.  That's possible, though I'm not sure this should be the biggest worry that manufacturers of wind turbines and solar panels have today.

The Harvard forecast is based on a detailed, risked country-by-country assessment of production potential, with the bulk of the projected net increase in capacity from today's level of around 93 million barrels per day (MBD) to just over 110 MBD coming from four countries: Iraq, the US, Canada and Brazil. However, the study's lead author, former Eni executive Leonardo Maugeri, sees broad capacity growth in nearly all of today's producing countries, except for Iran, Mexico, Norway and the UK.  Although this is certainly a diametrically opposed view of oil's trajectory than the one promoted by advocates of the peak oil viewpoint, it is accompanied by the customary caveats about political and other risks, along with new concerns about environmental push-back.  The latter point is particularly important, since much of the expansion is based on what Mr. Maugeri refers to as the "de-conventionalization of oil supplies", based on the expansion of unconventional output from heavy oil, oil sands, Brazil's "pre-salt" oil, and the "tight oil" that has reversed the US production decline. 

Although this de-conventionalization trend is very real, it's one thing to envision a shift to an environment in which oil supplies could accommodate, rather than constrain global economic growth; it's another to see these new supplies bringing about an oil price collapse.  It's helpful in this regard to consider the three previous oil-price collapses that we've experienced in the last several decades.  The mid-1980s collapse is the one that Kevin Bullis of Technology Review seems to have latched onto, because much like today's expansion of unconventional oil, the wave of new non-OPEC production that broke OPEC's hold on the market was the direct result of the sharp oil price increases of the previous decade, after allowing for inherent development time lags. The analogy to this period looks even more interesting if the new Administrator of the Energy Information Agency of the Department of Energy is correct in speculating that the US government might be willing to allow exports of light sweet crude from the Bakken, Eagle Ford and other shale plays, to enable Gulf Coast refineries to continue to run the imported heavy crudes for which they have been optimized at great expense.  That could dramatically alter the dynamics of the global oil market.

However, I see two significant differences in the circumstances of the 1980s price collapse, compared to today. First, oil consumption was then dominated by a small number of industrialized countries, the economies of which were still much more reliant on oil for economic growth than they are today. Second, these economies were already emerging from the major recession of the late-1970s and early '80s--a downturn in which the 1970s' energy price spikes played a leading role.  For example, US GDP grew at an annual rate of 7.2% in 1984, the year before oil prices began their slide from the high $20s to mid-teens per barrel.  So when new supplies from the North Slope and North Sea came onstream, the market was ready and eager to use them.  Lower, relatively stable oil prices persisted for more than a decade. 

Current global economic conditions have much more in common with either the late-1990s Asian Economic Crisis or the combined recession and financial crisis from which we're still emerging.  Each of these situations included a short-lived global oil price collapse that ended when OPEC constrained output and the economy moved past the point of sharpest contraction.  The late-90s oil price collapse looks especially relevant for today, because increased production contributed to it.

A new factor that would tend to make any oil-price slump due to unconventional oil self-limiting is its relatively high cost.  Mr. Maugeri makes it clear that his output forecast depends on prices remaining generally above $70/bbl, and that any drop below $50-60/bbl would result in curtailed investment and slower expansion.  The picture that this paints for me is one in which new oil supplies would be there if we need them to meet growing demand but not otherwise.  That should narrow the implications of such an expansion for renewable energy.

As Mr. Bullis reminds his readers, the connection between oil and renewable energy is much more tenuous than many of the latter's proponents imagine.  The US gets less than 1% of its electricity supply from burning oil, so technologies like wind and solar power simply have no bearing on oil consumption, and vice versa.  That is less true outside the US, but the trends there are also moving in this direction.  So other than for biofuels, a steep drop in oil prices for any reason would have little impact on the rationale for renewables, except perhaps psychologically.  The two factors on which renewable energy investors and manufacturers should stay focused are the economy and the price of natural gas, against which renewables actually do compete and have generally been losing the battle, recently. 

Time will tell whether the Harvard oil production forecast turns out to be more accurate than other, more pessimistic views.  Yet while a drop in oil prices due to expanding supply wouldn't do any good for renewables, the single biggest risk the latter face is the same one that would be likeliest to trigger a major oil price collapse: not surging unconventional oil output, the impact of which OPEC will strive hard to manage, but a return to the kind of weak economy and frozen credit that we should all be able to recall vividly.  If anything, the consequences for renewables from that risk look much bigger today than a couple of years ago, because of the global overcapacity in wind turbine and solar panel manufacturing that built up as the industry responded to policy-induced irrational exuberance in several key markets.

Read More

The Summer Oil Slump

Instead of US consumers facing $5 gasoline this summer, as some analysts had predicted, we now find prices slipping well below $4 per gallon as oil prices respond to weakening demand, a stronger dollar, and steady supply growth.  Yet as welcome as this is, it's largely the result of a mountain of bad news: Not only does financial turmoil threaten the very existence of the European Monetary Union and its currency, the Euro, but economic growth in the large emerging economies is also slowing, at least partly in response to the weakness in the developed countries that constitute their primary export markets.  The engine of global growth for the next year or two just isn't obvious.  That's the backdrop for this week's OPEC meeting in Vienna.

Before we become too enthusiastic about the prospect of a period of cheaper oil, we should first put "cheap" in context.  Even ignoring West Texas Intermediate (WTI), the doldrums of which I've discussed at length, the world's most representative current crude oil price, for UK Brent, has fallen consistently below $100 per barrel for the first time since the beginning of the Arab Spring in 2011.  Yet even if it fell another $10/bbl, to about where WTI is currently trading, it would still exceed its annual average for every year save 2008 and 2011.  So while oil might be less of a drag on the economy at $90/bbl than at $120, that's still short of the kind of drop that would be necessary for it to provide a substantial positive stimulus, particularly when much of the drop reflects buyers around the world tightening their belts. 

The US is in a somewhat better position, thanks to surging production of "tight oil" in North Dakota and onshore Texas. This has more than made up for the inevitable slide in output from the deepwater Gulf of Mexico, two years after Deepwater Horizon and the ensuing drilling moratorium. With much of the new production trapped on the wrong side of some temporary pipeline bottlenecks, parts of the country are benefiting from oil prices that are $10-15/bbl below world prices, although short-term gains are a poor reason to perpetuate those bottlenecks, rather than resolving them and allowing North American production to reach its full potential.

Then there's the issue of speculation, which some politicians blamed for the recent spike in oil prices.  To whatever extent that was true--and I remain skeptical that the impact was nearly as large as claimed--we could be about to see what happens when the dominant direction of speculation flips from "long" to "short"--bullish to bearish--as noted in today's Wall St. Journal.  Since the main effect of speculation is to increase volatility, we could see oil prices temporarily drop even further than today's weak fundamentals would suggest they should.

All of this will be on the minds of the OPEC ministers meeting in Vienna Thursday, along with the usual dynamics between OPEC's price doves and hawks.  The pressures on the latter have intensified as Iran copes with tighter sanctions on its exports and Venezuela's ailing caudillo faces a serious election challenge.  OPEC meetings are rarely as dramatic as last June's session, but the global context ensures a keenly interested audience for this one.  Given the impact of gas prices on US voters, both presidential campaigns should be watching events in Vienna as closely as any traders.  $3.00 per gallon by November isn't beyond the realm of possibility.  It would only require a sustained dip below $80/bbl.

Read More