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.
Scale of the Global Oil Market
The RAND corporation recently released a report “Promoting International Energy Security” for the U.S. Air Force that, for the most part, contained the conventional wisdom about oil prices and energy security: in a global marketplace, there is little that one buyer can do to affect prices. The report then went on to state the importance of the US military in maintaining international trade routes and supporting energy infrastructure security around the world. On the whole, it was an anodyne report from a government contractor to its client that generally would have quietly been filed away.
However, the report did have one section that dove directly into a simmering area of contention: the Department of Defense’s investment in a domestic biofuels industry. Both the House and Senate Armed Services Committees have rejected the Department of Defense’s plans to purchase biofuels and to directly invest in domestic biofuels producers. The Senate will likely consider an amendment on the floor to attempt to reinstate the program in July. The specialist media quickly reported the controversial provisions, saying “Renewables no fix for U.S. military fuel woes” (Reuters) and “Alt fuels won’t solve military energy problems” (Greenwire).
An ongoing discussion among some of us analysts at Consumer Energy Report has been about whether having natural resources like oil or coal is actually beneficial to a country (see Are Countries With Vast Oil Resources Blessed or Cursed?, Oil Dependence — Tom Friedman’s False Narrative, and Oil — Easy to Produce, But Not Easy to Buy).
The argument which I’ve made is that a boom in natural resources production can cover up some short-sighted economic policies; in effect, the earnings from producing oil mean that countries do not have to invest in their education or produce their own manufactured goods. The other side of the argument is that it can only be a good thing for new resources to be found.
Leaving aside the question of whether natural resource wealth undermines institutions or causes corruption (and there is good evidence of a resource curse among developing countries) there is one thing that increased production of oil does, once it gets to be a big enough sector of the economy: it pushes up the value of that country’s currency.
All else equal (as economists always have to say), new production of natural resources strengthens the domestic currency. That’s because those resources are either exported or are used to replace imports.
A Complex Issue
A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the U.S., and the U.K. as examples of countries that have thrived even with resources.
The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and it is difficult to separate out individual causes.
As I have been researching and writing about Arctic energy development recently, there’s one important – and easy – policy prescription that often comes up: joining the UN Convention on the Law of the Sea (UNCLOS). As I mentioned in my article, “Energy Development in the Arctic: Threats and Opportunities” the USGS estimates that the Arctic region has 22% of the world’s undiscovered energy resources – and 84% of those resources are expected to occur offshore (so 18.5% of the undiscovered resources are on or under the Arctic seabed).