Monthly Archives: April 2016

Russia: Oil and Subterfuge – 4/29/16

Few economies are more dependent on oil than Russia’s. Revenue from oil and natural gas accounted for about 1/3 of its government’s budget, over half of its exports, and the ruble is correlated closely with oil prices. With prices falling from $100 a barrel to below $30 a barrel, Russia’s GDP fell 3.7% in 2015 with another drop expected for 2016 as prices are expected to stay below $50 a barrel until the end of the year. And even if prices recover soon as Russian officials say, their expectations of an end to a long recession are overly optimistic. Enduring its second year of recession, the Russian government will likely run a deficit of 3.4% of GDP in 2016 and struggle to control the exchange rate of the ruble, the fluctuations of which have undermined recovery policies.

In contrast to Kremlin officials, the World Bank and the International Monetary Fund both expect the economic downturn to continue unless substantial reform takes place, a view shared by many private businesses in Russia.

“We are more cautious, more conservative and less optimistic in the private sector than government officials, who are traditionally more optimistic,” Mr. Aven, head of Alfa Bank, Russia’s largest independent lender, said as he cited state involvement and a lack of an competitive investment environment as reasons for the slow recovery.

Bank of Russia Governor, Elvira Nabiullina, recently repeated that the monetary policy will be focused on inflation control and the development of domestic capital markets in response to sanctions, both conservative moves suggesting a lack of confidence in a quick recovery.

“The pace of economic growth is our internal problem,” she said. “Whatever the oil prices are, even $100 per barrel again, we won’t be able to grow by more than 1.5%-2% without structural reforms and better investment climate.”

Sanctions imposed by the U.S. and the EU over various acts of Russian aggression towards neighboring states are unlikely to end soon. Despite divisions within European nations over Russia, Putin himself admitted that the sanctions will last “for the foreseeable future.”

Opposition to a natural gas pipeline from Russia to Germany is just the latest example of tension between the European Union and Russia, with some eastern members chafing under western leadership that ignores their energy needs. The pipeline is key to Russia’s plans to boost exports. The pipeline has met resistance from eastern EU members including Poland, Slovakia, the Baltic States, and Ukraine, which either get income from gas transit fees or wish to diversify their energy imports beyond an unstable and confrontational Russia, have called Nord Stream 2 “anti-European.”

“At the beginning there was a strong voice that this is a purely commercial project, but I don’t remember any commercial project that would be so intensely debated on a political level,” Sefcovic said in an interview in Bratislava. “It sparked an intensive geopolitical debate on the future of Ukraine and energy security of southeastern Europe.”

In addition, propaganda skirmishes between Russia and Western nations are adding fuel to the fire. Incidents like the “Lisa Affair”, a fake migrant rape controversy attributed to Putin’s regime as means of undermining Germany’s Merkel before regional elections, have only strengthened resolves against Putin even as some pro-Russian, anti-migrant politicians made electoral gains.

“Russia is starting to weaponize electoral processes in Europe,” said Joerg Forbrig, senior program director of the German Marshall Fund of the U.S. in Berlin. “The Lisa Affair was a real eye-opener.”

The moves by the Kremlin to influence German politics have infuriated Merkel’s government and led orders to probe the Kremlin’s role in such scandals. Germany already has a taskforce aimed at countering Russian misinformation; it works on the assumption that Putin’s goal is bolster pro-Russia parties. An official in Merkel’s Christian Democratic Union said almost all of the ruling coalition’s Russian-German voters have defected to pro-Kremlin AfD, which also appears to be getting funds from Russia, according to Alina Polyakova at the Dinu Patriciu Eurasia Center at the Atlantic Council in Washington.

In France, Marine Le Pen’s far-right National Front has received funding from a Russian lender and is seeking 25 million euros from others to bankroll its 2017 presidential campaign. Le Pen, Putin’s most prominent political supporter in western Europe, is currently polling second.

China’s Environmental Problems – 4/28/16

Facing economic uncertainty and environmental deterioration, Chinese officials have been more open to alternative energy and emissions regulation.

In late March, the Chinese government issued a major policy announcement known as “Document 625”. Document 625 focuses on renewable energy; it is meant to increase the amount of energy from wind, solar, hydro, and other renewables used on the power grid after years of under-utilization due to coal getting preferential access. The central feature of Document 625 is a mandate for grid companies requiring that they purchase at least a minimum amount of output from renewable generators. Because of the political power of the coal industry and falling coal prices, larger percentages of wind- and solar-generated electricity failed to reach the grid, a phenomenon called curtailment.

Document 625 introduces several new elements to China’s energy policy including: direct compensation of renewable energy generators for curtailment to be paid by conventional generators, priority access and guaranteed purchases of renewable energy, new renewable energy pilot programs, and a shift in controls from unreliable provincial governments to the central government.

A major problem with such policies is the lack of concern for the underlying causes of past renewable energy curtailment, as well as a lack of explanations for feed-in-tariff mechanisms and sustainable funding for renewable energy. Regardless, the central government is pushing through more progressive policies that are harder for local governments to skirt around.

New guidelines aimed at reducing pollution come at the expense of coal-fired power plants operators that have powered China’s growth for decades. Beijing, in guidelines released on Monday, halted plans for many new coal-fired power stations and postponed construction of a number of approved plants until at least 2018 increasing the possibility of indefinite suspension. The announcement, by the National Development and Reform Commission and the National Energy Administration, will affect about 200 planned coal-fired power generators for 105 GW of power, more than the total electricity-generating capacity of Britain.

World coal consumption

China, one of the 175 countries that signed the Paris climate accord, is aiming to reach a peak in carbon emissions by 2030 via investment in wind and solar energy capacity and reduced coal use. Yet China’s power industry local governments push for new power plants to create construction jobs and expand tax bases even as the growth slowdown has reduced electricity demand significantly, meaning many of the power plants would be underused if they were built.

Compared to the United States, where more coal-fired capacity is retired each year than is planned to come online for the foreseeable future, China’s energy sector is much less responsive to market signals about coal’s dim future. In China, coal prices dropping mean bigger profits for state-owned electricity generators when highly regulated electricity prices are constant.

Solar capacity in the nation has soared more than sevenfold since 2012, while wind has almost doubled exacerbating the conflict between easy money fossil fuels and meeting renewable energy targets. The idle rate was 15% for wind turbines last year and about 31% for photovoltaics in the northwestern province of Gansu, according to data from the National Energy Administration.

State Grid Corp. of China, which manages the electricity grid, has blamed a lack of planning for limitations on the amount of power renewable energy generators can sell. “Neither the technology the grid uses nor the availability of investment funds were problems,” Chairman Liu Zhenya said.

Despite laws prohibiting curtailment, fossil fuel power plants in practice “have priority over renewables, leaving less room for solar and wind power in a country with a large overcapacity of coal-fired power,” according to WRI. “There is also a lack of clarity on how the renewable energy integration mandate should be enforced.”

“For the first time, the management rules stipulate that renewable energy power plants be compensated by fossil fuel plants that squeeze out their share of guaranteed purchase, making it costly for fossil fuel plants to generate electricity that should have come from renewable sources,” said WRI.

China’s Overcapacity Problem – 4/27/16

China has an overcapacity problem. Years of cheap credit and over-reliance on state-owned companies to support growth have resulted in industrial output so high and cheap that it threatens profits for producers across the globe.

Officials in Beijing seem to be only begrudgingly accepting that investment has diminishing returns as a driver of economic growth. Since infrastructure projects offering the best bang for each buck can only be built once, China’s shift towards consumer spending via unpopular restructuring of its bloated, state-dominated industrial sector was inevitable. Unfortunately, well-connected interest groups and a reluctance to do anything that could destabilize ruling Communist party for the sake of the economy could hinder reform efforts.

As China transforms its export-based economy into one of consumption and services, there are sure to be winners and losers. Regions of the country where businesses are well-suited to the transition to consumer goods and services are seeing growth rates above 6% even now, but areas heavily dependent on resources are struggling under declining demand and capital spending cuts. Provinces in the rust belt with little to offer besides coal and steel are likely to fight tooth and nail against the restructuring. And it is not hard to see why given that it threatens to displace an estimated 1.8 million workers in two of the country’s largest industries, as well as eating into tax revenues for local governments.

Although defaults are rising with defaults on publicly traded bonds in 2016 already equal to the total number in all of last year, many of the companies failing seem to be smaller ones without the clout to get government support. Smaller companies such as Dongbei Special Steel Group and iron-ore miner Zibo Hongda are basically left to rot while state-owned Sinosteel seen the redemption deadline on its bonds extended several times. Such favoritism suggests that companies are not being assessed on fundamentals so much as their influence in the government.

China ministries released new guidelines recently as a follow up to plans to restructure the coal and steel industries and care for displaced workers. The new measures focus on reducing unemployment, something seen as a threat to social stability.

In a similar restructuring two decades ago, Beijing cut tens of millions of jobs in what was seen a harsh, but effective overhaul of a bloated state sector. The government appears less open to such aggressive measures this time. Government data has shown economic growth slowing only slightly in the first quarter thanks to new loans, debt and investment in real estate and factories; however, such easing only sustains dependence on growth in sectors the government has called unsustainable. Plans calling for a 10% to 15% reduction of capacity in the steel and coal sectors over the next several years only appear significant until you realize that more than twice that amount of cuts are needed to bring supply in line with demand, while many other industries facing overcapacity have yet to be addressed at all.

To show commitment to reform, more of China’s state-owned enterprises will need to be shut down or restructured. Credit rating agency S&P made the decision this year to cut China’s sovereign rating outlook to negative from stable because of concerns about the speed of economic rebalancing. Moody’s Investors Service also downgraded the outlook to negative citing surging debt and weak reform efforts. Premier Li Keqiang pledged stop state support of the zombie firms dragging on economic growth, which is at the slowest in decades.

Chinese companies have never waited so long to get paid, according to data compiled by Bloomberg on non-financial corporations traded in Shanghai and Shenzhen.

cash conversion

“The longer the cash conversion cycle, the higher the risk of corporates not having enough cash to repay their debts,” said Iris Pang, senior economist for greater China at Natixis SA in Hong Kong. “That creates a chain reaction.”

“When the economy slows to a point, everyone drags their feet in repaying business partners,” said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “We will see more defaults because longer time to collect cash means companies need more financing to keep their business going, which will increase their financing costs.”

China’s oil, gas and coal companies saw a particularly high jump of 68% in cash conversion days jump due to the commodity price decline.

cash convert sector

Coal use in declining as Chinese President Xi Jinping pushes for use of cleaner fuels and a shift away from heavy industry. His policies are being met with resistance and bargaining in the Shanxi Province, which relies heavily on coal. Provincial officials report that they are seeking to export excess supplies and have proposed the elimination of export quotas.

The nation’s coal exports increased to 1.27 million metric tons last month. China’s domestic demand for coal is forecast to fall for the third year in a row.

China’s Debt Problem – 4/26/16

As government policy pushes the Chinese economy towards growth targets, easy credit is leading state-owned companies to take on increasingly burdensome debt loads. In moves similar to those made during the 2009 crash by Chinese officials , the government has made borrowing costs low to encourage companies to grow in spite of lower profits and higher default risks in the long run.

Now those policies are losing their effectiveness and the threat of a financial reckoning seems closer than ever. In 2016, the operating profit of the average Chinese firm was only twice their interest expenses on debt versus 2010 when they could cover interest six times over. The debt expansion has been perpetuated by the People’s Bank of China, which has lowered benchmark interest rates six times since 2014 to help the economy reach the growth rates set down by the central government. Oil and gas, metals, and mining sector companies are especially strained by excess debt built up during prolonged commodity price declines.

Spending borrowed money may help China ease a transition to an economy driven less by investment and more by consumer spending and services, but it also risks slowing much needed reforms. Inefficient state-run companies tend to absorb most of the easy credit. It is tempting to point to areas like industrial output and real estate that rose faster than expected in March as successes, but they are the typical money sinks used to promote growth. If fueled by debt, that rise could mean more of the overcapacity deemed unsustainable by the central government. For example, the property market’s contribution to growth was 7% higher this past quarter heavily concentrated in a few big cities suggesting speculation and overbuilding.

China’s economy already showing signs of stress. Although, investment in fixed assets grew 10.7% over the quarter, the rate was only up 5.7% at private firms as opposed to 23.3% for less profitable state-owned firms. In 2015, their profits fell 21.9%, compared with a 3.7% increase for private companies. The overshadowing of private firms by state-owned ones is especially problematic since the government is counting on private sector jobs to make up for losses caused by reforms in what is likely to be a rough transition away from an investment driven economy.

Policy makers in Beijing are likely driven by largely arbitrary growth targets set at a range of 6.5% to 7%. Once targets are reached, officials are likely to be less generous with credit; however, the a new paper published by the International Monetary Fund suggests that it might be smarter to start curtailing early. In a recent paper about the systemic buildup of two decades of credit-fueled and state-directed growth, the IMF estimates bad corporate debt in China—obligations owed by firms whose profits can’t cover interest payments—amounts to $1.3 trillion, a problem that could trigger bank losses equal to 7% of the country’s GDP and cause a financial crisis damaging the world economy.

The paper questions Beijing’s proposal to allow banks to swap debt for equity in failing firms or bundling up those debts to be sold as securities as was done in the U.S. to help deleverage industries in the aftermath of the financial crisis. The authors expressed concern with the implementation of such plans as a means of dealing with the bad debt weighing on the economy.

“They are not a comprehensive solution by themselves,” said the authors of the paper, “Indeed, they could worsen the problem, for example, by allowing zombie firms (nonviable firms that are still operating) to keep going.”

They also mentioned that issues could arise as a result of China’s legal system and the complicated relationship many of the companies have with the government.

Economic Growth and Emissions Cuts: Not Mutually Exclusive – 4/25/16

Falling clean power prices and increasing public concern over climate change are convincing many conservatives to go green. Conservative support for policies tend to focus on economic growth, not climate science, so support for renewables started rising with Republicans around the same time cheaper wind and solar power started bringing in more jobs and revenue. Still, a record number of conservative Republicans are considering global warming a threat even if the Republican presidential front runners deny it.

The underlying source of conflict in climate change acceptance is the economic impact associated with cutting emissions. Whether or not carbon emissions can be uncoupled from economic growth is a major concern since greater economic activity often means using more coal or oil to fulfill new energy demand. Humanity faces a Sophie’s choice between environmental disaster and economic stagnation. Countering climate change will always have some cost, but the counter argument is that doing nothing will be much more expensive in the long run as cities start going underwater.

Fortunately there is evidence that economic growth and emissions cuts are not mutually exclusive. The rise of shale fracking. setting aside fracking’s own environmental drawbacks, has allowed the U.S. to replace older, dirtier coal plants with cleaner natural gas-fired power plants. Combined with the rapidly falling price of wind and solar farms, natural gas’s increased popularity could mean a declining emissions even as the economy recovers.

Early carbon-cutting programs have so far had positive results. Nine northeastern states would have produced 24% more CO2 emissions without their Regional Greenhouse Gas Initiative in 2009, while their combined GDP still grew by about 8%. Meanwhile, British Columbia enacted a carbon tax in 2008 resulting in emissions per capita falling 12.9% below its pre-tax year with no obvious harm done.

Any emissions regulation is likely to go through the Environmental Protection Agency, which faces criticism from those saying it goes too far, as well those saying it should go further. Officials must weigh business interests against those of public health, seeking an acceptable balance during countless lobbying meetings and court cases.

Energy Bill Passes with Bipartisan Support – 4/22/16

Congressional deadlock is considered par for the course nowadays, but occasionally a much needed piece of legislation will manage to dodge the riders and partisanship that usually kill off bills in the House and Senate. Fortunately, the Senate recently pass in 85-12 vote one such bill concerning energy that would create modest renewable energy initiatives and update oil and gas infrastructure; its success is attributed to a lack of items usually causing partisan conflicts. A similar bill was passed in the House, but included measures that led the White House to threaten a veto forcing more debate. A compromise between the two energy bills is now in the works.

Though not as dramatic as the end of the oil-export ban or the extension of tax credits for wind and solar power projects, measures in the bill are expected to have a significant effect on energy in America. Items on the bill include: a review of mandates to incorporate biofuels into gasoline, infrastructural improvements in response to the oil and natural gas boom, policies on the incorporation of rising electricity from renewable energy, and many others related to energy efficiency and the power grid.

The chances of a bill reaching Obama’s desk while remaining palatable enough to avoid a veto have been boosted by increasing support for renewable energy among Republicans since falling costs and a rising number of jobs are giving impetus to the shift to clean power which was long derided as expensive and job destroying. Climate change believers or no, the cost of wind and solar power is plummeting. And from the drop in prices, market forces are creating some counter-intuitive situations where red states, like Texas, are leading in new projects simply because access to high wind speeds and sunlight make them tantalizingly profitable.

by state

According to Bloomberg, the average long-term contract price for wind power paid by utilities has dropped 60% since 2009. Including subsidies, the prices are on par with off-peak power prices in some regions, BNEF analyst Nathan Serota said. The solar price drop has been even steeper, falling 65% with contracts as low as $37 per megawatt hour, Serota said.

Screenshot 2016-04-23 at 8.29.16 PM

So while Donald Trump, Ted Cruz, and most GOP party leaders reject the fact that humans have played a role in climate change, many Republicans are ready to consider renewables an investment with great tangible returns. They grow less inclined to toe the party line on clean energy as they realize the benefits of cheap electricity, increased energy independence, and economic development, especially in impoverished rural areas, outweigh the costs of breaking with an outdated expectation of opposition.

Screenshot 2016-04-23 at 8.33.36 PM

Republican districts as seen above are benefiting greatly from wind and solar companies. Such companies employ nearly 300,000 people in the U.S. in 2015, or roughly 400% more than the number employed by the coal industry, according to the American Wind Energy Association, so dissent from elected officials whose constituents benefit much more from wind than coal is understandable. For instance, though Republican Senate Majority Leader Mitch McConnell has rallied his party against the “war on coal” affecting Kentucky’s coal industry, Republicans from states in the Plains region where wind power is cheap and coal production is minimal might easily resent being railroaded into an anti-renewable position.

Screenshot 2016-04-23 at 8.35.00 PM

Doha Aftermath – 4/19/16

Leading up to the ineffectual Doha freeze talks, the IEA noted that producers are pumping at near record rates except for a few nations, the most notable being Iran. The recently unsanctioned major, Middle-Eastern country declined to send a representative to the talks on the grounds that any curbs on oil output would amount to self-sanctioning. The agreement was scrapped as Saudi officials, on the urging of Saudi Arabia’s Deputy Crown Prince, demanded it be dependent on the future inclusion of Iran; it was chalked up as a casualty of the economic and political rivalry between the two nations.

Losses in the American market to U.S. shale drillers forced Saudi Arabia to rely more on European and Asian markets which are now threatened by the return of Iran to international oil markets. To protect its market share Saudi officials abandoned its old strategy of limiting output to prop up prices and pumped at record levels. This new direction led to the current price collapse. Credit ratings of many oil-producing nations have already been downgraded during the oil glut as a result. Caring more about protecting its market share amid the revival of Iranian exports, Saudi Arabia increased production to an all-time high of more than 10.5 million barrels a day and cut prices to Asian customers to compete with Iran during the glut. The country has even gone so far as to give discounts in a price war with Iran to match their many proxy military engagements in the Middle East.

Saudi Arabia and Iran represent two sects of Islam, respectively, Sunnis and Shiites, and are regularly on opposing sides in regional conflicts like Syria’s civil war and the unrest in Yemen. The Saudi Kingdom cut off diplomatic ties with Tehran this year after its embassy was mobbed in retribution for the execution of a Shiite cleric.

Though most believed the talks would at least result in a symbolic freeze agreement, there are many reasons why Saudi Arabia would desire a total failure for the Doha talks. Firstly, if the nation committed to freezing production, then its hands would be tied if it wanted to protect market share as Iran increases exports. Next would be the kingdom’s desire to avoid a sharp increase in oil prices. Propping up prices would only keep rival suppliers in the U.S. alive; it would be completely counter to the original plan of using a competitive advantage in low cost extraction to force U.S. shale drillers into bankruptcy. The Doha meeting could have also been an attempt to force Russia to choose between higher oil prices and supporting Iran.

In the end, any deal excluding Iran was never going to alter the supply-demand mismatch. Producers agreeing to “only” produce at current, record levels was more to show how the countries involved were capable of a unified response. A goal that they failed to accomplish. The next possible chance for an agreement comes on June 2 during the scheduled bi-annual OPEC meeting.

The Doha talks floundered, but strikes in Kuwait that cut its oil output by over half for several days were a well-timed distraction for markets. Kuwait sought to restore 1.7 million barrels a day worth of crude production, an amount exceeding the current global surplus, while the state refining company slowed operations at its three oil-processing plants. Kuwait oil workers ended the strike in OPEC’s fourth-largest producer after three days when the government refused to negotiate while the walkout lasted. The workers, protesting cuts in pay and benefits amid the global glut of crude, returned to work and a quick restoration to full capacity is expected with little in lasting effects. The strikes like other unexpected disruptions to supply in Nigeria and Iraq were temporary cuts in a market needing permanent ones.

The only substantial reductions in output are being made in U.S. onshore oil production. U.S. crude production fell below 9 million barrels for first time in 18 months and the EIA cut its 2016 output forecast to 8.6 million barrels a day from 8.67 in March, according to its monthly Short-Term Energy Outlook. The agency reported that operators might be unable to capitalize on rising prices with their weak balance sheets, lack of banking industry support, and manpower losses during bankruptcies expected this year. Still, the shale boom surprised everyone once and the preponderance of pre-drilled wells, rigs, and the quickness of starting up in shale oil relative to traditional and offshore oil, could mean a unexpected revival that could keep prices even lower for even longer.

Prices Trump Politics in Energy – 4/18/16

The energy policies set down by federal, state, and local governments can have dramatic effects on what fuels we use, how we use them, and where they originate. But, energy policy can wind up looking pretty quaint when oil prices drop from $100 a barrel to $30 a barrel, taking economies of nations violently from boom to recession.

Though the U.S. economy is much more diversified than say Russia, it still relies on the energy industry for about 6% of GDP so the whipsaw volatility of oil prices can give rise to some interesting cases of economic fundamentals going over the heads of policy makers. For instance, TransCanada’s Keystone oil pipeline, a major component of the U.S. oil transport network, shutdown in response to signs of a leak. The public was largely indifferent to the news. And rightly so given that oil stockpiles are already bulging amid $40 a barrel oil. The lack of interest in the shutdown sharply contrasts with the prolonged fight over the company’s proposed Keystone XL line; a conflict resolved when the project was denied a permit by the Obama administration. The current oil glut has put to rest more oil-and-gas projects than environmentalists could ever hope to.

Though economic fundamentals are largely beyond controlling, governments are still expected to at least try to push the economy towards favorable outcomes. For the Obama administration that means setting forth the final rules regulating deep sea oil rigs. Begun six years ago in response to the BP Deepwater Horizon rig explosion that killed at least 10 workers and caused the largest oil spill in U.S. history, the Interior Department regulations impose new standards on equipment and monitoring of deep water or high pressure drilling as part of an effort to clamp down on the environmental impact of the oil and gas industry.

Most oil companies lobbied against the mandates on the grounds that they will cost billions and reduce incentives for drilling in the Gulf of Mexico. Drilling offshore in Gulf waters accounts for 18% of U.S. crude production versus shale drilling which made up almost 50% of total U.S. production during its peak. Oil companies lobbied for exceptions to the rule since over half the offshore wells drilled since 2010 would fail to meet the mandates, something that could discourage future drilling. The federal government forecasts that Gulf of Mexico production will increase to 21% of total crude production by 2017 in spite of low prices and regulations thanks in part to existing drilling projects being operated in hopes of offsetting large fixed costs.

The new rules and risks associated with further regulation may encourage a shift in investment to shale drilling. Shale-oil wells can be drilled in a matter of months as opposed to years for deep water rigs as evidenced by EIA data showing U.S. oil production shifting towards younger wells that are almost entirely shale-based wells drilled before the price collapse. The impact of the regulations on total U.S. production would pale in comparison to the effect the speed of shale’s recovery will have.

well age

Total U.S. energy production increased for the sixth consecutive year according to data in EIA’s Monthly Energy Review. Energy production reached 91% of total U.S. energy consumption with an 8% increase for crude oil, a 9% increase for natural gas plant liquids, and a 5% increase in natural gas production. In contrast, coal production saw a 10% decline on competition from natural gas and a hostile regulatory environment.

US total production

Coal exports fell as a result of lower demand in Europe and China, while atural gas exports to Mexico rose and are expected to continue rising as the U.S. is on track to become a net importer of natural gas by mid-2017.

US consumption

Coal’s decline in the electric power sector has been the major factor in the changing fuel mix of energy consumption. Most sectors have seen significant shifts from coal to natural gas consumption in recent years resulting in falling carbon dioxide emissions since natural gas is less carbon-intensive than coal.

If nothing else, the energy glut has shown how much stronger market forces can be than political ones. Sure, regulations have taken their toll on coal and encouraged the shift to cleaner burning natural gas, but nothing the Obama administration has done holds a candle to low natural gas prices when it comes to  killing off coal-related investment.

Oil Deal in Doha – 4/15/16

After prices crashed more than 70% from $100 a barrel in 2014, US oil companies drilling shale were the ones hurt the most by the supply-demand mismatch. U.S. output is expected to drop by 725,000 barrels a day in 2016 as credit ratings cuts hamstring debt payment efforts by debt-laden drillers.

Leniency last year is being followed by strict cuts as lenders acknowledge the likelihood of long term price weakness, how much value drillers’ assets have lost, and pressures to reduce their exposure to the energy industry. In 2016, lenders have already reduced credit extended to oil and gas companies by 12%. Oil prices are expected to recover to $50 a barrel later this year as hundreds of the struggling firms are forced to idle rigs amid bankruptcy. According to the IEA, global oil markets will “move close to balance” in the second half of 2016 as lower prices take their toll on high cost producers like shale and oil sand focused extractors. The agency estimates a decline in the oil supply surplus to 200,000 barrels a day from 1.5 million from the first half of 2016 to the next, the agency said in a report on Thursday.

iea oil surplus

In the mean time, the price of oil continues to fluctuate thanks to speculation over a possible agreement between OPEC and Russia; however, commitment by Iran to boosting production by hundreds of thousands of barrels a day will likely sink the deal or at least render it impotent.

In an effort to regain market share post-sanctions, Iran has gone so far as to sell oil at a discount. The discount comes at the expense of Saudi Arabia, OPEC’s largest producer and Iran’s primary geopolitical rival, the leaders of which have said its participation in a freeze is contingent on Iran also agreeing to maintain current levels of production. High ranking members of the Iranian government have been hostile to the freeze talks for a while now. Unsurprisingly, Iranian officials refuse to curb already shriveled output. Iran has not yet committed to sending officials to the Doha meeting where Russia, OPEC, and other major oil producers will discuss a possible output freeze.

The meeting, held in Doha, Qatar on April 17, will include Russia, Saudi Arabia, Qatar, Venezuela, Algeria, Angola, Azerbaijan, Colombia, Ecuador, Indonesia, Iran, Iraq, Kazakhstan, Kuwait, Mexico, Nigeria, Oman and the United Arab Emirates. It will not include major producers Norway, Canada, China, Brazil and the United States. Discussions between Russia and Saudi Arabia suggest that the meeting will result in an agreement to cap output even without Iran, but many attending producers are already producing at near maximum levels. In other words, the talks are likely to be a morale victory, not a material one. Market sentiment after the talks will how us how effective playing with emotions can be.

Self-Driving Cars Attracting High Rollers – 4/14/16

Electric cars stole the spotlight with the recent unveiling of the Tesla Model 3, but self-driving cars are also set to drastically disrupt transportation. The two technologies, both set to hit mainstream markets in force over the next few years, complement each other in that a vehicle using a battery and motor is simpler system to program for than one also using a combustion engine, which is part of why Google’s test cars are all electric.

With regards to energy, if electric cars mean shifting to a different source of power, then self-driving cars mean changing actual demand. Vehicles giving mobility to groups otherwise barred from driving due to age or disability would certainly increase their driving time; however, traditional drivers could lose or gain hours depending on how cuts in time spent in traffic or looking for parking balance out with willingness to drive more in a day given the opportunity to actually get things done while in transit.

Companies from the old brand auto and part makers to the Silicon Valley tech giants are trying to tap the potential fortunes to be made from autonomous vehicles. To do so, many firms are dropping billions on acquisitions and development. General Motors Co.’s proposed purchase of Cruise Automation Inc. for more than $1 billion is only the most recent and high profile example. Carol Reiley, president of Bay Area startup Drive.ai, said her company just raised $12 million from venture-capital investors. Another firm, Zoox Inc., recently became the 12th company granted permission to test self-driving cars on public roads in the state of California for use in a ride-hailing service. Others include Google, Ford Motor Co., Tesla Motors Inc. and General Motors Co. Zoox faces competition from Uber and Lyft which have also been working on autonomous-vehicle projects.

“The Cruise purchase is making VCs notice,” she said, referencing the GM deal’s potential impact on future investment in similar startups.

Consultants at PricewaterhouseCoopers LLP estimate 2015 merger-and-acquisition activity by automotive suppliers reached nearly $50 billion as auto companies try to meet demand for more connected vehicles with autonomous-driving capabilities. Meanwhile, IHS Automotive sees annual sales of self-driving or driverless cars reaching 21 million within 20 years.

Auto makers aren’t only acquiring new technologies and teams to develop them, they’re also pushing regulators around the world for consistent rules to make sure autonomous vehicles are integrated as fast as possible.

“It’s very important that we…lobby in every single country with the regulatory authorities to take our eyes off the road and our hands off the wheel,” Carlos Ghosn said, noting that his companies are working with U.S. and Japanese regulators.

The Obama administration has proposed spending nearly $4 billion in 10 years helping along the roll-out of autonomous vehicles and the U.S. National Highway Traffic Safety Administration has already released a report this year highlighting possible legal issues facing driverless cars. In addition, the agency is developing standardized rule recommendations for states on autonomous vehicles in response to concerns over the current mishmash of state rules.

“It’s an auto maker’s biggest nightmare that you have one standard in California, a different standard in Wyoming and a different standard in Tennessee,” said Jim Lentz, Toyota Motor Corp.’s North American chief. “The standards need to be the same in all 50 states. Imagine in 2022 you have an autonomous vehicle that can be steering-wheel-less in Arizona and then you drive to California and California says you have to have a steering wheel.”

Still, few major US cities are factoring the impact of autonomous cars, according to a report released in the fall by the National League of Cities. “Even though driverless cars may be shoehorned to fit the traditional urban environment in the short term, it won’t be a long-term solution for maximizing potential benefits,” says Lili Du, an assistant professor of transportation engineering at Illinois Tech. Autonomous cars will change distribution of parking lots, fueling stations, and electric vehicle charger stations just name a few affected pieces of infrastructure.

Off roads, BMW AG hopes to use self-driving vehicle technology on factory floors  in robotic trolleys as part of an automation drive meant to cut costs by 5% per car annually. According to the company’s production chief, Oliver Zipse, the vehicles autonomously find the desired parts container, slide under it and transport it to the packing area. With assembly lines as efficient as they are, moving around parts is one of the few areas where productivity gains can still be made. Programs such as this one are meant to help the company fund the development of self-driving features and other technologies.

Page 1 of 2
1 2