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.

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