TRUMP, PERRY AND ENERGY DOMINANCE
June 27, 2017 § 2 Comments
In a recent story, Secretary Perry offered up the national imperative: “pave the path toward U.S. energy dominance”. President Trump has also used the rhetoric of dominance. In most settings, the word stands for a position of control. In energy, it could mean control of price and unfettered availability for domestic consumption. Perry especially cited oil, gas and coal, so we will restrict our discussion to the first two and consider where matters stand today, to appreciate possible new directions by the administration to achieve these goals.
First some editorial comment. Dominance is rarely desirable. The folks dominated hate you and will extract their pound of flesh somewhere. Energy independence is the next one down the line. This too is not desirable, because interdependence, especially with friendlies, is of value. Besides, as discussed below in the case of oil, it is more economically favorable than independence. Finally, there is energy security. This one is a solid yes. It translates into cost effective energy available when needed by the nation.
Shale gas has created a situation for the US that is not far from dominance, but not by design. The abundance, enabled by the technology of hydraulic fracturing, has caused the price in the US to be under USD 3 per MM BTU for years, and likely to remain under USD 5 several years out. The US is now an exporter of Liquefied Natural Gas (LNG) rather than an importer. This has led to a worldwide drop in gas price. A price controlling cartel led by Russia failed to materialize solely due to the US shale gas phenomenon. The US price continues to be half to a third of most places in the world. Domestic industries relying on natural gas are having a renaissance, compared to their competitors abroad. Effectively, US shale gas is controlling the world price, despite gas being a regional commodity. This walks and talks like dominance, albeit unintentional.
Prior to 2015, oil price was controlled by the OPEC cartel to be in the vicinity of USD 100 per barrel. The influx of shale oil caused the price of oil to plummet to about USD 50 within six months, beginning in late 2014. It has stayed down there since. The Saudis are credited with playing the high stakes gambit of not cutting production to prop up the price, with the intent of mortally wounding shale oil in the US. A hundred bankruptcies and default on USD 70 billion in debt notwithstanding, the industry is strong as ever. The resiliency was in part due to technical and operational innovation, and in part due to the presence of ready buyers. ExxonMobil, Shell, Chevron and ConocoPhillips have firm new footprints with an avowed intent of major investment, at the expense of costly forays, such as into the Arctic. A parenthetical point here is that the Trump reversal of the Obama era Arctic freeze (on new lease sales) has no net effect; the investment will not go there.
Shale oil can turn on (or off) a dime. A new well takes weeks to come on line, as opposed to years on offshore platforms. This response time allows shale oil to ride the waves of price fluctuation. Continued innovation will drop the breakeven well below USD 40 per barrel, and is already there for many prospects. Expect oil price to remain in the range USD 40 to 65 for years, with minor excursions. I predicted this very range in my 2015 book, and nothing has changed. We can safely conclude that shale oil is keeping the price of oil down in the range mentioned, despite OPEC desires. In effect, therefore, US shale oil is now the determinant of the world oil price. Not exactly dominance, but certainly a high degree of control.
Where does that leave this administration with respect to assuring “dominance”? Just don’t mess up a good thing. President Obama removed the oil export ban in December, 2015; this had been long overdue. This was crucial for the US energy economy because US light sweet shale oil was not best suited for US refineries. The discounted heavy oil from Canada, Mexico and Venezuela was preferred. The lift of the ban allowed export of shale oil, thus removing a domestic glut, and an associated oil price discount of WTI versus Brent. The steady state situation of high price shale oil export and low cost heavy oil import is a net positive for the economy. Buy low, sell high.
More recently, gas pipelines to Mexico are being augmented. This is a welcome development for the natural gas industry, still shackled by extremely low prices. Mexico, in turn, can key on oil, both offshore and onshore, rather than shale gas. Their conventional oil is increasingly getting heavier, and the US market is important. In return they are buying light shale oil from the US. All of this is important for the health of US energy production and US jobs. This administration ought to avoid doing anything to upset this relationship, such as rhetoric on the inadequacies of NAFTA. Pipelines are long term capital items. Capital investment is dissuaded by uncertainty.
With the unwitting control of price on both oil and natural gas, some may see us in a dominant position. But, more importantly, we can look forward to a North American self-sufficiency on oil and gas by about 2020. That assures energy security and should be the modified fossil energy goal for this administration, rather than dominance.