Sunday, March 26, 2017

Taking another short break - no post this week

The aftermath of my father's death has been terribly busy and once again made it impossible to focus on writing a piece for this week. Most of what needed to be taken care of is now done, and so I fully expect to post again on Sunday, April 2.

Sunday, March 19, 2017

Taking a mournful break - no post this week

My father's death and upcoming funeral have made it impossible to focus on writing in the last week. He was an exceptional human being, and he will be sorely missed. I expect to post again on Sunday, March 26.

Sunday, March 12, 2017

Saudi Arabia and the war on shale oil that never ended

Last week when Saudi Arabia let it leak that the kingdom has no intention of leading OPEC toward another cut in production to accommodate the growing volumes of oil from American shale deposits, it was another sign that the Saudi war on shale actually never ended.

To properly understand this announcement, we need to return to last fall. Most people believed then that the cuts agreed to by OPEC under Saudi leadership marked the end of Saudi Arabia's war on shale oil in America. At the time I cautioned against such a conclusion, and said I was doubtful that there would actually be any decline in world oil production because the Saudis didn't really want a decline.

And, guess what? The OPEC cuts have yet to be fully implemented and have been offset by rising production elsewhere. And, the Saudis are now complaining that the Russians who, though not part of OPEC, agreed to cuts to support prices, are not keeping their end of the bargain. The Saudis are practicing a marvelous bit of misdirection to keep any blame away from themselves. With the Saudis, it's always necessary to look at the entire game board in order to understand their moves.

So, why are the Saudis content to allow oil prices to remain this low and possibly drift lower? I believe it's because their war on shale never ended; they mean to destroy the long-term financial viability of oil from shale deposits--and that job won't be finished until investors say, "Never again!"

Apparently, investors in American shale deposits have very short memories or they have not had enough punishment. They continue pour money into the Permian Basin located in Texas and New Mexico. The Permian is likely to be the only U.S. shale oil deposit that will see growth in oil production this year as low prices continue to take their toll on other shale plays such as the Bakken in North Dakota.

But there are only so many profitable sites in the Permian, and with the continuing rush of capital into the area, the good ones will start to run short at some point. We'll only know that's happened when the second great wave of wealth destruction in the shale fields begins as I suspect it will in the not-to-distant future.

And don't be surprised if the Saudis are content to let oil prices droop into the $20 range again just to get their point across.

As the next round of capital destruction begins, be prepared for stories about how dramatic efficiency gains in drilling operations are making it possible to bank profits in the Permian at an oil price of $40 per barrel. Then watch the same story repeat for $30 per barrel.

The last time we saw this movie there were dubious claims that oil in the higher-cost Bakken could be extracted profitably even with prices at $30 per barrel. As prices have stabilized around $50 per barrel, Bakken production has continued to decline. In part this has been because realized prices have been much lower due to lack of pipeline capacity. This has meant most Bakken oil must be shipped by rail tank car which is expensive.

Maybe this time investors will finally feel the pain from their shale investments so profoundly that even a subsequent substantial rise in the price of oil won't lure many of them back. If so, the Saudis will finally achieve their goal, and the war on shale will end.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 05, 2017

Our search for economic growth invites fraud

In his book The End of Normal economist James Galbraith makes a compelling case that our search for a return to the fast rate of economic growth experienced in the United States from 1945 to 1970 has led to fraud--fraud enabled by government actions that sought to "free the economy" from the shackles of "overregulation" and update the regulatory framework to meet "new challenges" such as globalization.

It turns out these sometimes well-intentioned moves signaled to the unscrupulous that Uncle Sam would be looking the other way when they duped customers, defrauded suppliers and swindled investors. In his book, Galbraith tells us how this happened.

First, we must understand that economic growth during the aforementioned period was exceptional and not the norm. Hence, the title of Galbraith's book and his main focus. During this period the economics profession embraced the idea that such growth was normal, and policymakers, politicians and most American citizens came to believe that it was.

The reasons for this exceptional growth were more the result of good luck than anything else:

  1. The United States had come through World War II almost completely unscathed with a vast industrial infrastructure built for the war, but now available for more pacific pursuits.
  2. The country was about to embark on a baby boom that would goose consumer demand for decades and power the economy forward.
  3. The United States was a resource-rich country with huge reserves of oil, natural gas, coal and uranium; large native deposits of key metals including copper, iron, and zinc; and vast fertile farmlands that turned out food and fiber enough for both America and the world.
  4. The country had a reputation for stable legal and governance arrangements which encouraged investment.
  5. The United States had unrivaled security, protected as it was by two oceans and a nuclear stalemate with the Soviet Union.
  6. The U.S. dollar became the linchpin of the world monetary system under what is known as the Bretton Woods agreement; now, everyone needed dollars to buy what America was making to revive their war-torn economies.

Everything went swimmingly--that is, for the economy--until the 1970s when oil shocks slowed economic activity and led to a puzzling combination of high inflation and high unemployment in the United States. These shocks had, in fact, become inevitable as America's own production of oil topped out and began to decline starting in 1970. America had a lot of oil, but not enough to continue to raise production continuously forever.

With the disappointing performance of the American economy in the 1970s, the Reagan administration promised better economic performance. Part of that better performance was to be delivered through deregulation which, as it turns out, was an invitation to fraud in the savings and loan industry.

When sound, profitable opportunities for ethical players abound, there is no need for chicanery. In fact, the ethical players cooperate to root out the unscrupulous ones in order to prevent widespread fraud from undermining confidence in the actions of the ethical players.

But, when there are few opportunities for the ethical participants--because the economy isn't growing very fast or growing at all--the unscrupulous find their opening. And, they open vast new fronts for profit and economic activity. Eventually, they become the dominant players, driving out the ethical participants who can't produce such extravagant returns while sticking to their principles.

Policymakers opened the way for this pattern by believing (wrongly) that the U.S. economy should be able to sustain the previously high growth rates experienced between 1945 to 1970 without the special circumstances that made that growth possible. High growth became "normalized" in the minds of policymakers. Those hunting for the reason behind slow growth often determined that government regulations were part of the problem. The troublesome regulations were then eliminated in order to unleash a wave of new investment that was supposed to return economic growth to the desired path. But the growth thus unleashed was illusory and often devastatingly fraudulent.

This is what happened due to the deregulation of the savings and loan industry in the 1980s. It is what happened in the home mortgage market in the 2000s. And, there was more than a hint of this is in the dotcom boom of the late 1990s which funneled money to many tech startups that had questionable business plans. The lack of solid business plans in the face of a surfeit of eager tech investors gave rise to crafty promoters offering an ample supply of not-so-solid business plans.

Here is how Galbraith summarizes the problem:

When resources to fuel economic growth are abundant, fraudulent activities are not generally tolerated. There are opportunities for "honest profit" and those pursuing such profits work to control the system, which means that they favor enforcement of laws against cheats and chiselers. However, when resources become scarce or expensive, opportunities for large profit for honest business are few. If the expected rate of profit--the rate that financial markets insist on as a condition for providing loans--nevertheless remains high, then fraud becomes a main channel to profitability, and fraudulent activities become part of standard practice. Fraud is a response, in short, to the failure of lenders to adjust to a decline in real possibilities.

In an era of slow growth that calls out for such an adjustment, we can only expect a continuation of fraudulent practices until the expectation for outsized profits comes down to a level consistent with actual conditions.

It is, of course, not in the interests of America's leaders (or world leaders, for that matter) to manage public expectations about growth downward. A political or corporate message based on slow or no growth is the path to electoral or professional oblivion.

It turns out that we have harvested the low-hanging fruit from the the tree of growth--electricity, the internal combustion engine, the spread of public health, the rise of major worldwide communications networks--and now we are left with marginal improvements according to Robert Gordon, who cataloged the special nature of the period from 1870 to 1970 in his book The Rise and Fall of American Growth. The cellphone, it turns out, is still a phone. (Yes, I know it is a camera now, too. But the camera is a fundamental invention that has not been superseded. It has only been improved and refined.)

It's not that we won't see profound inventions that change our lives in the future. It's just that we won't be introducing electricity to every household again. And, we won't be building a worldwide communications network for the first time, but rather refining what we have.

If someone tells you differently, you should be especially careful about buying any of the investments he or she is offering.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 26, 2017

The Dutch love affair with natural gas: A cautionary tale for the United States?

The story sounds familiar. For decades oil and natural gas drilling have been proceeding and creating prosperity for those involved. At some point significant earthquakes occur in areas where they were formerly very rare or nonexistent. Those quakes are linked to oil and gas drilling and production. The industry denies the link.

The quakes continue, get worse and finally get strong enough to do damage.

To those living in the United States, this reads like stories coming out of the fracking boom in states that include Oklahoma, Texas, Ohio, Kansas and Arkansas. To those living in Europe, it's the story coming out of The Netherlands, home to the Groningen Gas Field, one of the largest natural gas finds ever.

The Groningen field has been both a blessing and a curse for the Dutch. Since its discovery in 1959 the Dutch have reaped huge financial benefits from having their own secure and abundant source of natural gas. Beyond that, the country has until recently been a major exporter of natural gas to its European neighbors.

But the field has also proven to be a drag on the rest of the economy, inflicting what has been dubbed the "Dutch disease." In short, the Dutch disease refers to negative effects that a huge natural resource find can visit upon a society. These include a decline in other sectors of the economy and a strong currency which makes exports less affordable to foreign buyers. The moniker "Dutch disease" results from the fact that The Netherlands was the first place such effects were studied in detail.

What has caught the Dutch by surprise--and may someday soon catch America by surprise--is the speed with which its decades-long reliance on a large initial endowment of natural gas has turned into a liability.

First, there were the earthquakes linked to drilling and production operations in Groningen which have forced the government (part owner of the field) to scale back production to reduce the frequency and severity of those quakes. This production decline of more than 50 percent has meant a serious loss of revenue for the government which used those revenues for decades to supplement the government's budget. Government gas revenues dropped by more than half from €13 billion to around €5 billion from 2013 to 2014.

Second, as a result of the production cutbacks The Netherlands is now a net importer of natural gas, instantly losing its self-sufficiency status. Europe's gas now will likely have to come increasingly from Russia whose relations with Europe are replete with complications.

Third, the Dutch have failed to prepare for this day. Instead, they blithely made themselves deeply dependent on natural gas for their energy needs. Some 98 percent of Dutch homes use natural gas for heating and cooking. Renewable energy makes up a paltry 5.5 percent of the country's energy mix as of 2014.

Fourth, the Dutch are still obliged to honor long-term contracts which force them to deliver substantial quantities of natural gas to customers outside the country. The country is increasingly facing the strange predicament of having to import more and more natural gas to offset what it must ship abroad. This is in a country whose dominant field, Groningen, is now 80 percent depleted.

And, here is where the Dutch situation ought to be a warning to the United States. America is entering into more and more long-term contracts to export liquefied natural gas (LNG) to customers in Europe and Asia even as the country remains a net importer. There is good reason to believe that most estimates of future natural gas production in the United States are far too optimistic. Let me quote for the second time in three weeks from an independent analysis of U.S. shale gas production trends (the only class of natural gas experiencing production growth in recent years):

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Second, the U.S. electric utility industry has added significant natural gas-fired generating capacity in response to two trends: government regulation of greenhouse gas emissions and the low price and rising availability of natural gas. Despite the election of Donald Trump, who favors a return to coal, the low price of natural gas will probably allow the conversion to and expansion of natural gas-fired capacity to continue...until it can't. At which time we may be stuck with much higher electricity costs.

The promised natural gas deliveries will likely not be available at low prices. Production declines will result in a battle over who gets the remaining supplies, thereby hiking prices for U.S. consumers. The U.S. utility industry may rue the day it chose to make itself so heavily dependent on natural gas.

Finally, states that became addicted to money from the natural gas boom are finding the bust difficult to navigate. In comparison, the Dutch had one large boom that lasted for decades. The kind of exploration and development that is taking place in U.S. shale gas fields requires constant drilling just to maintain production at current levels. We can expect boom and bust in short spurts from here forward. That signals that the cost of exploiting the remaining shale gas resource (again, until now the only growth area in U.S. natural gas production in recent years) will almost surely stairstep higher as lower-quality deposits are tapped at greater and greater expense.

The Dutch have had a very long love affair with natural gas. But, as it turns out, a seemingly comfortable, stable relationship with natural gas can unravel just as quickly as a real love affair, leaving one dazed and asking how it all happened so fast.

Americans may not be as dependent on natural gas as the Dutch. But they have rushed into their own torrid love affair with natural gas and lost sight of the fact that affairs which start out torrid are the same ones that tend to flame out quickly, surprising everyone with their sudden demise.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 19, 2017

Taking a short break - no post this week

I'm taking a short break and expect to post again on Sunday, February 26.

Sunday, February 12, 2017

Does the Australian LNG export experience foreshadow soaring U.S. natural gas prices?

Two times last winter Australians living in the country's eastern region paid more than twice as much for natural gas as did Japanese customers taking delivery of liquefied natural gas (LNG) from the same region. (Australia has three separate natural gas pipeline networks which create three domestic natural gas markets, Eastern, Northern and Western.)

The price spikes had eastern natural gas users, particularly business users, hopping mad about what they perceive as foolish energy policy. That policy, they say, gives away Australian energy resources at bargain prices to foreign countries while making domestic industries that are reliant on those resources less competitive because of high energy costs. In addition, the new volatility in gas prices makes planning difficult and expansion financially risky.

The dust-up in Australia has some people thinking that the same thing could happen in the United States, something I pointed out in 2013. In the United States the Federal Energy Regulatory Commission has approved natural gas export terminals with a capacity of 17 billion cubic feet (bcf) per day. That represents 19 percent of current U.S. natural gas production. If all terminals for which applications are pending or expected are included, the number goes up to 42 bcf per day or about 47 percent of current production. Only one U.S. export facility is currently in operation in the lower 48 states. Another facility in Alaska has been exporting LNG to Asia since 1969.

It's worth noting that U.S. marketed natural gas production is down a little over 1 percent for the 12-month period ending November 2016. During the same 12-month period net imports were about 654 bcf or about 2.7 percent of total consumption. That's right. The United States remains a net importer of natural gas even as it contemplates a major expansion of LNG export capacity.

Back in Australia electricity blackouts in the state of South Australia are being blamed partly on the mothballing of a major new natural-gas-fired electric generating plant. The operator had contracted for large deliveries of natural gas at low prices to fuel the plant. But with the price of LNG exports from Australia soaring, it became so profitable to resell the gas for export that the plant was never opened. (That was before the domestic price spike. But by then the plant's gas was already committed.)

The rapid expansion of natural-gas-fired electricity generating plants in the United States leaves the country vulnerable to similar dynamics that also include higher electricity rates. Most utilities get to pass fuel price increases on to their customers. And, LNG exporters cannot withhold deliveries and sell their contracted gas back into the domestic market if prices spike. They are obliged by long-term contracts with their customers to deliver. In addition, LNG customers are typically bound by take-or-pay contracts which oblige them to take LNG deliveries or pay for them anyway. Which do you think they'll choose to do?

The U.S. natural gas industry argues that natural gas production is bound to rise and keep on rising for a long time. The U.S. Energy Information Administration (EIA) is forecasting a continuous increase in annual U.S. production through 2050 when production is supposed to reach 40 trillion cubic feet (tcf), up from just 26.5 tcf in 2016. The EIA is basing its forecast on dramatic gains in so-called shale gas production since conventional gas production continues to decline.

But the reality is already much different. As geoscientist David Hughes tells us in Shale Gas Reality Check published in December 2016:

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Higher prices might turn the trend around. But higher prices will also make LNG exports less attractive to world markets. A deeper reading of Shale Gas Reality Check--which provides detailed analysis of all major shale gas plays based on actual production trends, not company press releases--suggests a declining U.S. natural gas industry rather than a growing one in the years ahead.

The industry promise of large and growing supplies at low prices was a fiction from the beginning designed to get regulators to approve export facilities that would bring U.S. natural gas prices closer to world levels--and thus make the natural gas industry more profitable.

There is actually a principled argument for the industry position. But it would be popular neither with voters nor with the legislators who represent them, and the industry understood this. Here is the argument: The natural gas industry should be allowed to sell its products to the highest bidder anywhere in the world just like every other industry in America. If we are now truly in a global economy, then natural gas should become a global commodity and Americans should pay the global price.

Some governments, however, perceive that the central role of energy in the economy warrants special rules that retain domestic energy sources for domestic uses. After all, nothing gets done without energy. Along these lines the Australian government is currently getting an earful from irate natural gas business and household customers.

In theory environmentalists should be content to see fossil fuel prices including natural gas prices drift higher in the United States. That makes renewable energy more attractive to investors. But environmentalists fear that providing an outlet for America's shale gas via LNG to world markets will only make the environmental nightmare associated with fracking in shale gas fields that much worse. The industry would then be able to go after deposits that only higher world prices make viable.

In all likelihood many of the proposed LNG export projects in the United States will never be built. Glutted world LNG markets are giving investors pause. As it turns out, the U.S. natural gas industry wasn't the only one that saw opportunity in gaining access to the LNG export market.

Whether the United States will see more frequent natural gas price spikes or an overall long-term increase in domestic natural gas prices will depend partly on how investors and regulators perceive the availability of future U.S. natural gas supplies and the conditions of the LNG export market. On balance the evidence suggests that they remain too optimistic about both.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.