Five energy surprises for 2015: The possible and the improbable

The coming year is likely to be as full of surprises in the field of energy as 2014 was. We just don't know which surprises! I am not predicting that any of the following will happen, and they will be surprises to most people if they do. But, I think there is an outside chance that one or more will occur, and this would move markets and policy debates in unexpected directions.

1. U.S. crude oil and natural gas production decline for the first time since 2008 and 2005, respectively. The colossal markdown in world oil prices has belatedly been followed by a slightly smaller, but nevertheless dramatic markdown in U.S. natural gas prices. The drop in prices has already resulted in announcements from U.S. drillers that they will curtail their drilling operations significantly next year.

But drilling that is already contracted for will likely go forward, and wells waiting for completion will be completed. It can be costly to pull out of drilling contracts. And, failing to complete already successful wells and bring them into production is downright foolish since the costs incurred in drilling the wells including future debt payments remain. In those circumstances, some revenue at lower prices is preferable to no revenue at all.

Greed explained: J. Paul Getty, Aristotle and the Maximum Power Principle

Regular readers know I often write about energy, and while this piece may not at first blush seem like an energy story, you'll soon see that the quest for an ample supply of energy is, in fact, at the heart of human greed.

Greed is often said to be a central cause of our ecological and social ills. It motivates excessive and injurious exploitation of the planet and thus threatens the existence of many species including humans themselves. It leads to excessive economic inequality and the social ills presumed to be associated with that inequality. And, of course, greed is regarded as not just bad for the biosphere or society; it's bad for the soul and therefore earns a place on the list of the seven deadly sins.

Many people are convinced that greed is learned and therefore can be unlearned or not taught in the first place. Others believe that greed is simply an inherent evil in humans, part of the human condition.

The high cost of low-priced oil

As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But...

If you work in the oil industry, you will not.

If you work in the renewable energy industry, you will not.

If you work in the energy efficiency business, you will not.

If you work to address climate change, you will not.

If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not.

If you live in a country that exports a lot of oil (not just Saudi Arabia, but Mexico, Canada and Norway, too), you will not.

How the U.S. could fight OPEC and win (and why it won't)

OPEC has declared war on American oil production with the intention of making the country more dependent on imported oil and on oil in general. By refusing to cut production in the face of weakening world demand, the cartel has allowed oil prices to fall more than 35 percent since mid-year to levels that are likely to make most new oil production in America's large shale deposits unprofitable. That could not only halt growth in U.S. production, but may lead to an actual drop because production from already operating deep shale wells declines about 40 percent per year.

The United States could chose to fight back and possibly win this war with OPEC by employing one simple, big move. But, I can confidently predict that the country will not do it. Why? Because it involves a tax, a tariff actually.

Back in 1975 then-Secretary of State Henry Kissinger proposed that the world's oil importers adopt a floor price for oil. The purpose was threefold: 1) encourage domestic oil production, 2) accelerate the development of alternative energy sources by making their price more competitive with oil and 3) encourage conservation of oil and oil-derived products such as gasoline and diesel fuel.

Turnabout: OPEC shows U.S. oil producers who's boss

To paraphrase Mark Twain: Rumors of OPEC's demise have been greatly exaggerated.

Breathless coverage of the rise in U.S. oil production in the last few years has led some to declare that OPEC's power in the oil market is now becoming irrelevant as America supposedly moves toward energy independence. This coverage, however, has obscured the fact that almost all of that rise in production has come in the form of high-cost tight oil found in deep shale deposits.

The rather silly assumption was that oil prices would continue to hover above $100 per barrel indefinitely, making the exploitation of that tight oil profitable indefinitely. Anyone who understood the economics of this type of production and the dynamics of the oil market knew better. And now, the overhyped narrative of American oil self-sufficiency is about to take a big hit.

Nuclear war: A forgotten threat to human sustainability

The possibility of a new Cold War between Russia and the United States and its NATO allies brings with it the spectre of nuclear war, an all-but-forgotten threat since the breakup of the Soviet Union in 1991.

Even as the number of nuclear weapons has declined through mutually agreed reductions from a worldwide total of 68,000 in 1985 to an estimated 16,400 today, the destructive force of such weapons is so great that if the remaining ones were used, they might well spell the end of human civilization as we know it.

One indication of the rising threat is what NATO calls an "unusual" increase in Russian military flights over Europe involving so-called Bear bombers, long-range Russian counterparts to American B-52 bombers. But, of course, U.S. and Russian nuclear forces have been operating all along since the end of the Cold War even as their arsenals were being slashed. The threat of nuclear war was always there even if tensions were falling between Russia and the United States.

Did Russia and China just sign a death warrant for U.S. LNG exports?

Russia and China have signed two large natural gas deals in the last six months as Russia turns its attention eastward in reaction to sanctions and souring relations with Europe, currently Russia's largest energy export market.

But the move has implications beyond Europe. In the department of everything is connected, U.S. natural gas producers may be seeing their dream of substantial liquefied natural gas (LNG) exports suffer fatal injury because of Russian exports to the Chinese market, a market that was expected to be the largest and most profitable for LNG exporters. Petroleum geologist and consultant Art Berman--who has been consistently skeptical of the viability of U.S. LNG exports--communicated in an email that Russian supply will force the price of LNG delivered to Asia down to between $10 and $11, too low for American LNG exports to be profitable.

Now, let's back up a little. U.S. natural gas producers have been trying to sell the story of an American energy renaissance based on growing domestically produced gas supplies from deep shale deposits--now being exploited through a new form of hydraulic fracturing called high-volume slick-water hydraulic fracturing.

Why GMO labeling in the U.S. needs to win only once

There were no doubt celebrations last week in the boardrooms of corporations that own patents to the world's genetically engineered crops. Proposals to label foods containing these crops--commonly called GMOs for genetically modified organisms--were defeated soundly in Colorado and barely in Oregon.

That makes for a perfect record in the United States for the GMO purveyors who have beaten back every attempt to mandate labeling of foods containing GMO ingredients. But, I think the celebrations may be premature. For the advocates of labeling have vowed to fight on. They came within a hair's breadth of reaching their goal in Oregon. Who is to say that another round of voter education might not put them over the top?

And, that is the danger for the GMO patent holders. If just one state requires labeling, the food companies will have to make a choice: Special handling and labels for one state or one label for the entire country that also meets that state's standards.* If the first state to implement a GMO labeling requirement is populous, say, California or New York, the decision will be made for the food companies. It won't be sensible to segregate supplies for that state. And, even a less populous state might tip the balance. Some states have passed GMO labeling laws that require enough other states to pass such laws to reach a minimum population threshold of in one case 20 million before the law goes into effect.

Is there really an oil glut?

Back in March 1999 "The Economist" magazine carried a cover photo of two men drenched in oil as they attempted to close a faulty valve that was spraying a huge stream of crude skyward. Over the photo was the headline: "Drowning in oil." At the time it really did seem as if the world were drowning in oil.

The previous December crude oil on the New York Mercantile Exchange touched $10.72 per barrel. That month U.S. gasoline prices averaged 95 cents per gallon. "The Economist" opined that oil might go down to $5 per barrel.

But, of course, in retrospect the magazine's cover proved to be the perfect contrarian indicator, for oil had already begun its historic ascent toward $147 per barrel. The 2008 price spike was the culmination of a 10-year bull market that had begun in December 1998.

Taking a short break--no post this week (and why)

I'm taking a short break. I expect to post again on Sunday, November 2.

Update Oct. 27, 2014:

Here's why I missed posting this week. I've been helping to publicize a new report by the Post Carbon Institute that takes aim at the Energy Department's rosy forecasts for tight oil and shale gas. That report is now available.

For the report, click here.

For the full media kit, click here.

(Full disclosure: I was a paid consultant for this publicity campaign. But, as my readers know, I've been saying for several years that the tight oil and shale gas boom would be short-lived. This report offers a broad and detailed analysis that supports that view.)