With Prices Falling, Now Is Time For Energy Independence

This week’s Courier Herald column:

 

While most of us were focused on finishing off Thanksgiving dinner and/or watching Philadelphia beat Dallas last Thursday, members of OPEC were having a less joyous meeting. The cartel that has managed to control oil prices for roughly four decades seems to be admitting at least a short-term defeat.

The group was unable to reach an agreement to cut production in the wake of world supply increases. The result was a two-day slide of 10% in prices, with US Crude ending Black Friday at $66 per barrel. For comparison purposes, the price of Crude was trading over $100 per barrel in late June. Oil is now on sale at one-third off. Many analysts believe this is just the beginning of a long-term slide in prices.

This is first and foremost great news for the American consumer. One third less spending on a necessity will usually become money spent on other things. $60 fill-ups that are now $40 fill-ups leave $20 to be spent or invested elsewhere. Businesses that use a lot of oil and gasoline will also reap the benefits of lower prices. Eventually, their customers will as well.

Much of the price drop can be credited to America’s emerging shale oil industry. Domestic production is increasing quite rapidly. Places like North Dakota are now employment hotbeds. Perhaps as early as next year, the United States may out produce Saudi Arabia as the worlds largest oil producer.

The fall in crude prices presents a bit of a longer-term opportunity and challenge. Not all oil is extracted from the ground at the same cost. As such, if prices continue to fall, some ventures that were quite profitable this summer may be losing money by spring. The jobs that the oil industry has been producing are likely to level off, or even decline if the slide in prices becomes great enough.

The challenge for the US is not so much as to provide certainty for the new domestic producers, but price stability for the economy as a whole. Clearly lower prices are good for both consumers and businesses who use petroleum.   But the ability to have some range of certainty for planning and investment purposes also aids in economic efficiency.

Every President since Nixon has pledged North American energy independence, yet none have laid out a comprehensive plan to achieve it. We today sit at amazing intersection of increased domestic production of oil and significant technological developments in both alternative energy sources and energy efficiency.

Voters tend to demand solutions to energy problems when prices are spiking. The celebration and relief when prices enter free-fall also too often quench any appetite for long-term solutions. Especially if these solutions would require changes in behavior or could tweak prices back up slightly.

Much of the inflated oil prices Americans have paid over the past decade has been described as a premium for risk. Too much of our oil has come from the Middle East, and we are all painfully aware of the hostilities that remain within the region.

We’re also aware that what comes down can quickly return upward, as was the case the last time prices were this low. It took only months and a few negative news cycles from oil producing countries to return prices above $100 barrel.

Republicans continue to struggle to find a message that reaches beyond their traditional base. Figuring out how to continue to expand North American energy production to self-sufficiency should become a cornerstone of their message.

This must extend beyond a “drill here, drill now” bumper sticker slogan, and should not stop with the eventual approval of the Keystone pipeline. Nuclear power should be included, as the demand for electric cars will continue to expand the need for supply. Alternative fuels including solar, wind, and bio-feedstocks must be included as technology allows for viable integration into our consumption base without permanent long-term subsidies. We must find a balance between our abundance of coal reserves and environmental responsibility.

There’s an old saying that goes “the time to fix the roof is when it’s not raining”. The problem with extending that to politics and policy is that voters only tend to demand fixes during bad weather.

Anyone under the age of 50, however, will have difficulty remembering any significant length of time when domestic oil prices and even our economy were not being adversely affected by the OPEC cartel.   We’re now producing enough energy on our continent – with the technological capability to produce more and consume less – that energy independence is within reach.

Now is not the time to let up. Now is the time to fix this problem, once and for all.

 

26 comments

  1. androidguybill says:

    The energy issue is my pet peeve. I am a tech worker and enthusiast (as one might be able to guess from my handle) and even though my wheelhouse tends more towards server computers than power generators still:

    A) on the left you have “environmentalists” who are motivated more by Cold War era ideological animus against oil (and natural gas, coal and nuclear) companies than they are for energy independence (or the environment).

    B) on the right you have folks who do not realize that the “conservative” energy policy is created by think tanks, foundations and media outlets who get a ton of their contributions and advertising revenue from – you guessed it – oil, natural gas, coal and nuclear companies, as well as politicians like Sarah Palin and Ted Cruz whose local economies heavily benefit from the extraction economy. They’re the ones who have people in states without a single oil well or refinery (like Georgia) absolutely convinced that a Keystone XL pipeline that will create 60 permanent jobs and needs the price of oil to be over $70 a barrel to be viable is a top national issue. In other words, the folks who want us to 1) use as much oil as possible and 2) keep the price of oil as high as possible because it is more money in the coffers of the companies and it keeps a steady flow of tax dollars coming to politicians who do not have to, you know, actually do anything to earn it by making their states more economically competitive.

    Now as concerning A) I don’t waste my time … I apply the whole “never argue/wrestle with a pig” argument with our leftist/environmentalist friends. But with B) come on … can’t conservatives see how they’re being manipulated and used … how putting more money into the hands of ExxonMobil doesn’t create a single job in Georgia but an alternative energy breakthrough might? Every single time I click on an alternative energy link on a media site I dread looking at the comments section because it will be filled with Fox News watchers and talk radio listeners repeating their “socialism! waste of taxpayer money! Not viable! Solyndra!” talking points. (If these guys had been around in the 1950s we would have never had a space program, let alone all of that GOVERNMENT FUNDED basic research by the NSF, DOE, DOD etc.)

    It is upsetting, because all that is really needed is a little horse trading: some alternative energy research funds, incentives, federal/state/municipal projects (yes, many power utilities were government-run until the privatization wave after Reagan, and if we still had those government utilities we would be a lot further along in alternative energy, because that is the ideal realm to try out new technology … and yes we did have a ton of great talent in the public works sector in those days) in return for a relaxation of regulations in fossil fuels exploration and exploitation. But as both group A) and group B) regards this as the moral equivalent of compromising with Hitler and Stalin respectively, it never ever gets done. Instead, you have two groups trying their level best to crush each other and have total victory. The left doesn’t even acknowledge that letting Sarah Palin and Rick Perry have their Keystone XL and ANWR drilling in a compromise package deal today could result in incentives and basic research that would lead to major breakthroughs in alternative energy that would crush their hated oil companies (and the conservative politicians that they prop up) tomorrow.

  2. Chamblee says:

    As you say, great for consumers (I loved filling up for less than $50). But not so great for the domestic energy industry. Shale fracking took off because prices were so high, it was worth it to drill. Less so now (like our gold mines). If prices stay low, it’ll mean we go back to cheaper “foreign oil”. It’ll also mean the costs to switch to alternative fuels are too high.

    Unless, as I hope you are arguing, we invest in alternative technologies (even though they are more expensive in the short term) to free us from oil (domestic and foreign) in the long term. Hopefully that investment will free us from the real problem. Coal.

    I don’t have a number, but it would seem that with the studies on climate change costs taken into account the long term costs of coal far exceed it’s short term costs.

    http://www.npr.org/2014/11/04/361204786/falling-oil-prices-make-fracking-less-lucrative

    On a side note: http://en.wikipedia.org/wiki/Thorium-based_nuclear_power

    The apocryphal story is that the guy in charge of the US nuclear sub program went with uranium/plutonium because it was cheaper/quicker to build engines. Oops!

  3. GA4SF says:

    Alternative energy, specifically Solar is no longer just a “hippie” or “survivalist” issue. It is time to look for ways to lower costs, save money and secure freedom. Free market finance is a great way to see that happen.

    A conservative led organization http://www.gasolarfreedom.com is advocating for residential and small business to be allowed to enter into agreements to lease solar equipment. The benefits are many yet for starters here are 3. 1) Free market- the introduction of another energy source will help lower costs and inspire competition 2) National Security as the article cites keeping money domestically reduces our dependency on foreign oil 3) technology. With the rapid advancement of technology a “smart” grid is possible.

    As a conservative I advocate for an above all energy solution. Keystone XL build it, Fracking, do it. The sun doesn’t always shine in GA but isn’t it time we look at resources that aren’t able to be taxed? Moreover, “Going Green” should be looked at beyond the environmental tagline of “Green”…what about “Going Green” by saving greenbacks? What about creating jobs which can’t be outsourced? http://www.gasolarfreedom.com/news/icymi-how-many-solar-businesses-are-in-ga/
    Hopefully a bill will be produced in the upcoming legislative session which will begin the dialogue to include free-market financing for small-scale solar power that is widely available in other states can be used in Georgia. It would authorizes private sector financing that eliminates up-front costs and makes solar power an even more affordable choice for Georgia property owners, especially the middle class. Lets homeowners and others who don’t qualify or don’t make the cut in Georgia Power’s programs choose solar power at reasonable cost.Enables churches, schools, local governments, and the military to access affordable solar energy and save money on their power bills.
    Will spur growth in the emerging Georgia solar industry, attract investment from local, national, and international companies, and create high quality new jobs for Georgians.

    • NoTeabagging says:

      Keystone XL is about transporting Canadian Shale oil across the USA to our Midwest and Gulf refineries then exporting it for major private corporate profit (if the price is right). Canada isn’t sending us this oil to make USA “energy independent”. We aren’t extracting our own oil and gas at a rate to keep it and use it here for “energy independence.” Most will be extracted and exported.

      Jobs will be temporary, think retail holiday season. Better to create long term jobs fixing America’s infrastructure. Selling Keystone XL as a jobs bill is just more political lies.

      Shale oil extraction and refining is a nasty, dirty environmental disaster.
      According to the NRDC, ” Oil shale production involves
      heating rock to high temperatures and turning it to liquid. But this process
      requires massive amounts of electric resources, while sapping huge quantities
      of water from the arid West. Moreover, oil shale production could cause five
      times more global warming pollution than conventional gasoline.”
      http://www.nrdc.org/energy/numbers.pdf
      http://www.nrdc.org/energy/dirtyfuels.pdf

    • John Konop says:

      Jon every penny gas goes down it creates an extra billion dollars in spending….In all new ventures as far as business you will see winners and losers…I do think you will see some losers….but the ongoing revenue stream of energy makes the loses less than buildings and land which did not have a strong revenue model via the bust time…..70 % of our economy is consumer spending which makes low energy a big factor….also it driving remanufacturing in our country. Low energy prices a big factor…

      http://tvbythenumbers.zap2it.com/2014/12/01/msnbcs-morning-joe-launches-new-series-on-sustainable-progress/333638/

    • gcp says:

      The smaller, riskier energy companies may be hurt by this downward oil price move but the biggies such as XOM and BP won’t be affected much other than their stock prices will go down. Up and down moves are nothing new in the energy business. BTW fracking is also done for natural gas which is a separate market.

      • Jon Lester says:

        Sure, the big companies will buy out the smaller operations at a huge discount, as the banks go lobbying to socialize their losses. It’s still no reason to get yourself underwater with a mortgage and stuck in North Dakota.

  4. saltycracker says:

    The government should be involved in alternative energy research but they get out of their expertise or become corruptable when playing venture capitalist or investor/owner.

    The Saudi’s are keeping on pumping for a reason, they are probably fine at [email protected] and a lot of their neighbors/competitors like Russia might prefer toward $100 to meet their financial needs. Good time to bust a few of them and also sort out who can run with them on shale. If some start sweating they can sell below cost for awhile and thin the herd.

    • saltycracker says:

      AP news: Ruble hits all time low:
      “Battered by low oil prices and the conflict in eastern Ukraine, the ruble has been declining throughout the year, losing about 42 percent of this value since January.”

  5. Bobloblaw says:

    We have falling gasoline prices because of “Drill Here, Drill Now”

    Remember when liberals said more drilling wont lead to lower gas prices???

    Being a liberal means never having to say youre sorry.

  6. notsplost says:

    Well I’m no doubt in the minority here, but I suspect the whole “shale oil miracle” is about to be revealed as another Wall Street Madoff-style ponzi scheme. I don’t know what the magic number is where most of these “plays” become “uneconomical”, to put it politely, or “money thrown down a rat-hole” to put it less gently. But the lower oil goes, and more importantly stays, the more bankruptcies and Enron-style meltdowns we’re likely to see over the next couple of years.

    The good news is lower gas prices will give the 99% some relief, finally. And since fracking never made it to Georgia due to the vagaries of geology, we will probably enjoy the benefits of this racket imploding here without the downside that will hit places like Texas, North Dakota and other states.

    That is, unless all those junk bonds used to finance oil and gas exploration that are now the equivalent of stacks of benjamins chucked into the fireplace ended up in your pension fund or IRA.

    • Charlie says:

      1) Shale is real. North Dakota alone has gone from 100K barrels produced per day in 2004 to 1.1 Million barrels produced today. That’s 10% of America’s daily production. And growing. We’re now just a few hundred thousand barrels per day less in production than Saudi Arabia.

      2) All shale extraction is not equal. Analysts are all over the map over where the break point is, but much of it is estimated to be under $50 barrel.

      3) While many OPEC countries can produce oil much cheaper than $40/barrel, the revenue needed to subsidize their government/citizens is much higher. Russia needs more than $100. Venezuela is unsustainable at $160+. But even most of the traditional OPEC producers are in the $70 or north range. So, in short, while they may be trying to do a short term squeeze for pain, most aren’t interested in long term prices this cheap. Thus, our cost structure is competitive.

      4) Yes, with every emerging economy there are those who overpay and over -leverage. You will see some bankruptcies for some of the drillers and producers. That won’t idle the assets. That will re-allocate them to those with proper debt/overhead structures and cost speculative investors.

      I think your comment was mostly focused on point 4, and to some extent you are correct. But I don’t see the potential BK of over-leveraged drillers as a long term problem for shale extraction, mostly because of 1-3.

      • notsplost says:

        It is certainly risky business predicting the future. As you say, analysts are throwing numbers out all over the map and every play is unique in its cost and geology. I think the bottom line is that if it takes more money/net energy to extract the commodity than what you can get in return, that can’t go on for very long. Cheap financing and hedging in the futures markets will allow some uneconomic production to continue, but that only keeps the over-supply situation going longer, putting more pressure on price.

        Again I know I’m a lonely voice in the wilderness here, but I really think if you take the long view extracting the last few fossil fuel deposits in increasingly more difficult/hard to reach parts of the world is a losing strategy. Especially when you factor in the environmental costs which are never accounted for in the price per barrel but are borne by the public one way or another.

        • Charlie says:

          Again, there’s a reason that an “all of the above” energy independence strategy needs to be more than “drill here, drill now”.

          We have the benefit of shale now. I have no issue with using it at the exclusion of imported oil. That alone would provide a level of economic stability that is worth the negative externality of depending on those who want to do us harm to provide us energy.

          That said, we’ve seen a 25% increase in fuel efficiency for cars on the road (all cars, not just the new ones) since 2007. That’s just 6 years (2013 data). Technology will continue to make this better.

          Combine with more nuclear & solar, more biofuels (non food based) and we have the potential to continue to lesson our dependence on all oil, not just foreign oil.

          Given the amount of Nat Gas we currently burn off, we probably ought to dust off the Pickens Plan to look at long haul truckers fuel choices too. And if we can ever figure out how to efficiently separate hydrogen from water….

          • John Konop says:

            I have also read major breakthroughs coming soon with solar and batteries as well….You are right it has to be an all of the above approach, not looking for a silver bullet.

  7. saltycracker says:

    The reason for an all of the above approach is the US attracts the brightest most innovative minds in the world. None of us can conceive what breakthroughs might disrupt the energy world.

    For the elected to pick and choose, think they know how to finance or capitalize or even understand these folks is plain nuts and probably our greatest restraint. The smarter/ more likely to innovate the less their political influence as they don’t take the time to smooze or hire lobbyists.

    The government role is to support research in the many endeavors , not capitalization and let the chips fall for the many billionaires and venture capitalists backing think tanks and projects.

  8. Charlie says:

    Here’s a very long yet detailed overview of the cost curves US shale producers face, which ultimately explains why the US will continue to add production to the tune of about another million barrels/day over the next year regardless of the price drop:

    http://www.cnbc.com/id/102234051?trknav=homestack:topnews:1

    If you make it all the way to the end, you’ll notice another tease. After years of decline, Mexico is also finally re-engaging in new drilling/exploration. The shift from the Middle East/Russia to North America for crude production is quite real.

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