Christmas for Energy Industries
‘Twas the week before Christmas, when all through the House of Representatives, not a creature was stirring, except for lobbyists from all across the country securing deals on the Omnibus Appropriations and Tax Extension legislation.
It’s the end of the year in Congress, and some in the energy industry have been naughty, and some have been nice… though that doesn’t really impact who wins and who loses in Washington, does it? Let’s end the year by accounting of who in the energy industry got candy canes and sugar plums in their stocking, and who ended up with a lump of coal.
The Oil Industry
First up is the oil industry, who will open a present from Republicans in Congress of an end to the 40 year ban on the export of oil. Unfortunately, they won’t be able to play with their present for a few years, as oil imports are rising and low global oil prices have pushed the spread between WTI and Brent Crude (effectively the domestic US oil price and the global oil price) to near zero. Low oil prices are driving many small oil drillers out of business, and domestic American production of oil is starting to decline, after a surprisingly robust 2015 in the face of lower prices. If and when the price of oil goes back up, the oil industry may get some profits from exporting American crude, but in the meantime, there will only be a small amount of exports to refineries in Mexico or Europe that are short on the light, sweet crude that the U.S. is awash in. The real winners of this, though, are global markets and free traders.
Refiners will find coal in their stocking on Christmas morning, though they’ve been celebrating most of December after their win on the Renewable Fuels Standard. After fighting against the removal of the crude oil ban all year, all they’re left with is a bill to their lobbyists and a hangover. With the decline of the WTI-Brent spread, and they’re no longer going to be able to arbitrage the US market by buying cheap US oil and selling diesel and gasoline at world prices. Fortunately for them, they’ll be able to drown their hangover by celebrating their December 1 win over ethanol- when the EPA gave them the present of a reduced Renewable Fuels Standard mandate for the amount of ethanol they’ll have to blend into their fuel in 2016.
The Natural Gas industry didn’t get anything in their stocking from Congress this year, though they’re finally able to play with a present given a few years ago: LNG exports. The first shipment of LNG exports from the US will sail in early 2016 from Cheniere’s Sabine Pass facility.
While they’ll celebrate the milestone, they won’t reap many profits- the world LNG market is even more glutted than the oil market. Over the long run, however, the safety valve of exports may allow US domestic gas prices to rise enough to ensure a sustainable industry over the long term.
The biggest lump of coal of all in their stocking, ironically, goes to the coal industry. Right now, they’ve got more coal than they know what to do with. American coal miners like Arch Coal, Alpha, Patriot and Peabody will great Christmas morning either in or on the brink of bankruptcy. After the Paris Climate negotiations, they saw that the world will move against coal by moving aggressively to reduce greenhouse gas emissions. In the US, the EPA’s Clean Power Plan, combined with a sustained future of low natural gas prices, will ensure that few (if any) new coal power plants are built in the US again. The only lifeline for the coal industry would be exports – and the industry has long pointed to China as source or optimism, but even there, the IEA says coal use may have peaked. Moreover, exports would require approval of new export terminals in Washington, Oregon, or California- a present that those legislatures seem unwilling to give.
Perhaps Congress’s most unexpected present of the year goes to renewable energy, with the unexpected extension of both the Production Tax Credit for wind and the Investment Tax Credit for solar. The PTC is a 2.3-cent per kilowatt-hour credit that was extended through 2016, after which the credit will be cut each year until it fully expires in 2020.
The ITC provides a 30 percent investment tax credit to solar installers. It had been set to expire at the end of 2016, but it was now extended through the end of 2023, with a phase out beginning in 2019.
When put together with an ambitious global agreement in Paris to limit global emissions, the renewable energy industry (particularly those in electricity generation like solar and wind) have finished the year strongly. Markets have responded with surprise and support, with the market value of Solar City (to take one example) up by over 50% in a week.
Next Generation Energy
While renewables like solar and wind get the headlines, there’s a growing realization that powering an economy 100% on renewable energy will be a massive and expensive undertaking. Germany has shown that an economy can go a long way towards a large share of renewables, but also that variable electrical production from solar and wind also pose new and costly challenges to a modern electric grid. At the beginning of the Paris Climate Conference, world leaders came together with Bill Gates, the world’s richest man, to announce the creation of Mission Innovation and the Breakthrough Energy Coalition to dramatically accelerate research into the kind of clean technologies that will allow for clean, transformative baseload power. We don’t yet know how much money there will be in the stocking for these companies, but this is a Christmas gift that could keep giving.
In Congress’ omnibus spending bill, they left a small present under the tree for the American fusion research program, spending $438 million on research, $18 million more than the President had requested. Increasingly, there appears to be opportunities for fusion research to come from funding sources outside of government, as companies like Tri Alpha Energy and General Fusion have proved successful in raising private capital. If these technologies are successful, it will prove to be a bonus for the whole world – by providing clean, safe, secure, and sustainable energy to all.
The biggest present under the tree, however, is for the average American consumer. This year, the national average price of gasoline is hovering around $2 per gallon. The price of natural gas is approaching an all-time low of $1.8 per mmbtu, which means low heating costs – in an already mild winter for most Americans. All of this means that, thanks to reduced energy prices, Americans have more money to buy actual presents for their families this year. No one can say how long those low prices will last, but for now, American consumers can benefit from low energy prices across the board.