High Gas Prices During Election Season
Last week, reports from both Platts Energy News and Reuters said that officials in the Obama Administration are considering releasing oil from the U.S. Strategic Petroleum Reserve. The Platts report even said that a release was “imminent,” citing a meeting on Thursday at the White House with oil analysts. Other reports stated that the release could be up to 180 million barrels – six times as large as last summer’s.
Such a release would be contrary to the rationale of having Strategic Petroleum Reserves, and — coming only 60 days before an election — it would be a nakedly political ploy seemingly aimed only at alleviating a persistent political vulnerability: high gas prices.
Power to the States
Yesterday, I wrote about the shortcomings of the Romney energy plan, saying that by looking simply at supply-side, it only goes halfway; a real energy policy addresses both demand and supply sides. There is one part of the plan, however, that I want to highlight because I believe it deserves praise.
The section that stands out as genuinely new and innovative is Romney’s plan to transfer control over energy production on federal lands to states. A Romney Administration would allow states to “establish processes to oversee the development and production of all forms of energy on federal lands within their borders” with the exception of lands “specially designated off-limits” (presumably national parks and the like). Federal agencies would certify state’s regulations as meeting an “adequate” level, but would leave most of the decisions to the states themselves. Romney would then encourage a “State Energy Development Council” that would allow states to share best practices and work together. This idea of Energy Federalism would allow states – the “laboratories of Democracy” in Justice Brandeis’ terminology – to test different regimes for energy production.
Dealing With the Total Picture
Last week, Governor Romney released his plan for “Energy Independence” that promises to “increase domestic energy production and increase partnership with Mexico and Canada to gain energy independence by 2020.” Briefly, the plan proposes to increase domestic fossil fuel production by opening new areas to exploration and by reducing regulatory barriers to the building of new power plants.
My concern is that this is simply a one-sided energy policy – it focuses solely on increasing the supply of energy (and almost exclusively on fossil fuels, especially oil). A true energy plan would realize that no matter how much oil your country produces, it can never escape the world market price. In a world with a globalized market for oil, OPEC will always be the most important price-setter, and the price of oil will not be set at home. The price will track with demand from economic growth in India and China and will follow supply shocks from the most recent unrest in oil-producing regions, whether Iran, Sudan, or the South China Sea.
I want to post a quick rant on the uselessness of statistics about a country’s oil reserves. I was preparing this afternoon to write a blog post about the revolution in oil production in the US, caused by the adoption of new technologies of fracking and horizontal drilling in areas like the Bakken Shale and the Eagle Ford Shale.
The USGS reports that, with perspective additions, the U.S. holds 32 billion barrels (bb) of oil, 291 trillion cubic feet (tcf) of natural gas, and 10 billion barrels of natural gas liquids in mean potential undiscovered reserves. This is a substantial upwards revision from last year’s estimate – showing how the new technologies are revolutionizing America’s energy outlook.
Then I started doing the math. The U.S. uses about 18.7 million barrels of crude oil equivalent per day (mbd), according to the EIA. Of that consumption, we’re importing about 8.7 mbd, and producing about 10 mbd. That works out to a total annual consumption of about 6.875 bb of oil, of which about 3.65 bb is from domestic production. At those rates, America would completely exhaust its total reserves, as estimated by the USGS at 32 bb of oil in eight years, nine months. So, by April or May of 2021, the United States would no longer have any oil – if these reserve estimates went unchanged.
We all saw last week the largest blackouts in history, as first 300 million people in India, then 600 million lost electricity. While power is back up, it was a huge embarrassment to the government that exposed major difficulties in the power sector.
There are many problems with the Indian economy, like corruption, lack of long-term planning, and investment restrictions that hold it back from its potential. It has been difficult to remove the layers of bureaucracy that thwart investors. Corruption has remained pervasive at all levels. Political populism has led the government to impose strict price controls on many goods – this has hampered investment. The remnants of India’s post-war anti-import government policies have slowed the ability of foreign companies to directly invest in the country.
Different Situation Than Attempted Takeover of Unocal in 2005
Last week, the China National Offshore Oil Corporation (CNOOC) tendered an offer to buy Nexen, a smaller, independent Canadian oil company for $15.1 billion. The deal has been approved by Nexen’s board, and the price premium of 61% above the previously-traded share price should be enough to win-over Nexen’s shareholders. It still must pass scrutiny from the government of Canada, and of the United Kingdom and the United States, where Nexen has many reserves.
CNOOC had attempted a takeover of the American oil company Unocal in 2005. Then, a hostile response from the public and Members of Congress forced them to pull-back. Now, however, regardless of some opposition from within the U.S. Congress, the betting is that this deal will pass muster. The opposition in Congress is mostly from the usual suspects like Senator Schumer and Congressmen Markey and Forbes, who are using this as an opportunity to push other issues they have, like market access to China for American exporters or lease rates in the Gulf of Mexico.
Last Wednesday, the Green Strike Group sailed during the international Rim of the Pacific (RIMPAC) exercises off the coast of Hawaii. These exercises are the Navy’s largest of the year, and feature participants from around the world. The reason, however, that this is important to clean energy investors is that the Navy could act as a market maker for the struggling biofuels industry. If the Navy guarantees its market over the next decade, there will be certainty for biofuels companies to make the investments necessary to reach commercial scale.
Last Monday saw reports that Patriot Coal will seek bankruptcy protection. This pulled down the share prices of competitors like Peabody Energy, Arch Coal, and Alpha Natural Resources.
As much as the coal producers claim that this is because of an Obama Administration “War on Coal,” it’s more about market realities . As the price of natural gas has fallen to below $3.00 per MMBtu, due to the growth in domestic production of gas from the shale gas boom, it is mostly cheap gas that is undermining coal demand. Therefore, the coal industry should not expect the outcome in this year’s Presidential election to provide much relief.
As I wrote yesterday, I believe that High Speed Rail (HSR) is the best option for linking the country’s major regions together. The past week has seen two major developments in America’s development and deployment of high speed rail.
First, last Friday, the California Senate approved $4.6 billion in funding for the construction of the first section of the state’s HSR. This would allow $3.2 billion in federal stimulus funding to be released to the state. Second, on Tuesday, Amtrak released its updated proposal (pdf) to upgrade its Northeast Corridor (from Washington DC to Boston) to true high speed rail, capable of cruising at 220 miles per hour.
Connecting Massive Population Centers
As the population of the U.S. grows from a country of 300 million to 400 million over the next 30-40 years, we’re going to have some decisions to make about how we keep the country moving. In our biggest cities — also the source of the greatest portion of our wealth creation — the highways and transportation systems are becoming more jammed by the day. It should be obvious that more transportation infrastructure options are needed in America’s densely packed regions.
The Interstate Highway System has been successful in linking the country together, but I’m afraid that it promotes sprawling, auto dependent development — which essentially outsources a major cost (fuel) to consumers. More highways, even if they could be built to meet capacity, are not the answer for dense regions because they have proved to only encourage more oil-dependent sprawl.
I believe that High Speed Rail (HSR) is the way to build dense, interlinked cities and regions. This past week saw two major developments about the future of HSR, as the California Senate approved $4.6 billion in funding for the construction of the first section of the state’s HSR and Amtrak announced a plan for significant upgrades to the lines along the Northeast Corridor.