Perspective: Wars on Resources Hurt and Help U.S. Industry, People
Energy Resource Americas (ENRAM)
October 9, 2017 (last updated)
Chicago – Does US industry and citizens fully appreciate the energy market trends including the long-term impact of current economic, regulatory, and political wars on energy resources? While not as captivating as Zika, ISIL, the Kardashians, or Trump mania, the long-term cost to US economic and national security may negatively impact American businesses and jobs. U.S. business and people should take notice before it is too late. It is difficult to sort out even for some energy professionals. So let’s try and sort through the fog of these wars.
First the short version. Peak Oil is a war of numbers. The War on Coal is environmental versus union jobs and low energy cost options. The War on the Keystone Pipeline is really against hydrocarbons. The Wars on crude oil imports and exports is about US economic security versus free trade. All these wars may raise energy prices if they continue down the current path. Energy can be a highly complex business, but is often fought over local retail gasoline prices "at the pump." The issue is much bigger because energy goes into just about every product made, all power generation, and all transportation of goods and people. Low cost energy is a major advantage for the USA that should be protected for national and economic security.
Higher oil prices help alternative energy economics...Here is where the oil industry and alternative energy advocates should be somewhat aligned.
Both some industry leaders and people want prices to rise, while others need lower prices. Strange alignments exist in some cases by players on opposite political sides. Higher oil prices help alternative energy economics. For example, if hydrocarbon (oil, gas and coal) related prices rise significantly, then both energy producers and environmentalists win right? In such a scenario, alternative energy gets permanent legs, and does well. Think about that for a minute. Environmentalists and the hydrocarbon industry folks hand in hand - together forever. It could happen. Here is where the oil industry and alternative energy advocates should be somewhat aligned.
Now a little deeper discussion. Some of the many energy-related products and services impacted by volatile prices include: refined products like aircraft lubricants and fuel; diesel, gasoline and oil based lubricants for vehicles engaged in logistics, ground support and transportation; processed natural gas used for manufacturing, heating, fuel, and power generation; processed coal used for power generation, manufacturing and heating; and associated energy risk management like hedging derivatives - pretty much every aspect of energy consumed by industry and people.
Trends emerge. The first trend is likely not surprising – all these energy related costs will be volatile, but rising over the long term. Why? Well, without over-killing on analysis, demand will rise because the world will not stop growing, nor seeking to reduce pollution. Projected 2017 world oil demand is approximately 95+ million barrels per day, and 2017 projected oil supply is about 95+ million barrels per day (source: EIA). Volatility associated with price swings up or down, benefits energy trading organizations (oil company trading units and independent trading firms) who effectively balance supply and demand profitably. The last million or so barrels per day help determine the incremental price of all oil and related products - an amazing thing when you think about that. Balanced supply and demand stabalizes energy prices in a fairly tight range of roughly $5 per barrel up or down.
World demand for crude oil...grows every year. However, what industry actually loses about 4% of its production capacity...per year from existing sources?
World demand for crude oil and related liquids grows every year. However, what industry actually loses about 4% of its production capacity (supply) per year from existing sources? Answer: Only the crude oil industry. And the cost of finding large, long-term replacement supply is rising. Even major oil companies are forced to acquire smaller oil producers to augment their replacement production and reserves - a major basis for the valuation of their companies. At certain times slight changes in this supply/demand balance may cause violent marketplace reactions assuming the worst trends may never end.
The next trend is that crude oil prices will ultimately set the price for all other energy prices. Natural gas prices are influenced by crude oil prices - especially as a bi-product of crude oil production. Natural gas is one of the largest components of manufacturing cost, power generation, heating, and cooling - with demand on the rise. Coal is impacted by natural gas prices and represents over a third of the energy production in the US, but is on the decline. Higher natural gas prices generally raise coal prices and improve utility company results.
Crude oil prices are good indicators of all fuel prices. For aviation and trucking - jet fuel coming off the top of the crude oil barrel as a distillate. High jet fuel prices raise the price of air travel and for doing business in general - for all of us. High heating, power, gasoline, diesel and fuel oil costs cut into manufacturing margins, increase ground/marine transport costs, raise supply chain costs, and decrease critical consumer spending dollars - the basis for US economic success.
Lower crude oil prices act as a significant boost to US consumer spending - more so than in any other country - a somewhat balancing force in the US even though at times not great for energy producers, nor for energy stock investors, as oil prices have plunged recently. Lower gasoline prices put more cash in the pockets of consumers who then spend it in other retail establishments. In such low price environments higher volume, associated with stronger economic activity, should make up the difference in earnings for refining and marketing companies.
"Calculating the true cost of energy from hydrocarbons" is used as a way to raise hydrocarbon prices high enough to make alternatives more economically viable.
Energy alternatives seem to struggle when oil prices are low. Government support is often curtailed when oil prices are low, because the alternative energy economics look poor versus traditional energy sources. Again, here is where the oil industry and alternative energy advocates should be aligned for obvious reasons. With higher prices, oil producers, and the solar, wind, and other alternative energy economics improve. "Calculating the true cost of energy from hydrocarbons" is used as a way to raise hydrocarbon prices high enough to make alternatives more economically viable. Taxing carbon (like oil hydrocarbons) is gaining momentum as an incentive for companies and industries to reduce their carbon footprint - carbon being blamed for global climate change.
On a worldwide basis, crude oil supply is sometimes barely keeping up with demand; is harder to find today; and is getting more expensive to find in economically large enough discoveries. Just look at offshore exploration where major deep sea projects run in the billions of dollars. Risk is high a la the BP spill, for example, and has very high technology requirements. Would these companies be in deep-water, at such great expense, if there were plenty of on-shore long-term reserves? The recent surplus is only temporary when one considers long-term world growth, and potential disruptions in the Middle East, Ukraine, Russia, and Africa.
Political actions raise uncertainty, and are sometimes implemented with less consideration for economic realities on the ground. The fact that the oil industry has been so productive, and thus, employs so few workers, actually does not help it politically. Politicians can bash away at the oil industry with little impact on the votes they need. Just look how aggressively BP was attacked over the 2010 oil spill in the US Gulf of Mexico. BP's final bill could reach $60 billion. A pharma company drug once killed over 50,000 people, but the company paid out less than $3 billion in penalties and damages. Unfortunately, the massive economic contribution of the very successful oil and gas industry to America's growth and success is not fully understood.
The Wars will have national economic and security implications. If not carefully managed, various economic, regulatory and political actions may evolve into an atmosphere that some may describe as "wars on resources." That may ultimately raise energy prices to point of concern for the US consumer economy. We should take a closer look at some of these "wars" that may be ultimately hurting American industry and people. Smarter regulation and management of US energy is required.