Sunday, December 14, 2014

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.

The declining price of oil is supposed to have a balanced ledger of winners and losers. But we may be on our way to finding out that in the long run we will have a much larger list of losers than winners.

And, the list will lengthen if the price continues to fall, and especially if it stays down for a long time. (Low prices are not necessarily an indication of future abundance. Remember that oil reached $35 a barrel at the end of 2008 before returning to record average daily prices in 2011, 2012 and 2013.)

Now here is something to contemplate. Is the price of oil falling because we can no longer afford it? This is not an idle question. Record high average daily prices for oil in the last three years have been an unrecognized cause of sluggish overall worldwide economic growth. That subpar growth appears to be exhausting itself now, particularly in Asia and Europe. In dampening growth, high oil prices sewed the seeds of their own demise by ultimately dampening demand.

But, low oil prices will make it even harder to secure future oil supplies. The oil industry was already cutting back its exploration budgets before the price plunge. The industry said that there were not enough profitable prospects available even at $100 per barrel. What happens to industry exploration and development budgets with oil prices now around $60? Without exploration there can be no new production; and without new production, oil supply falls automatically.

Now, exploration and development are not being cut to zero. But they are being cut substantially. And, as with any mineral exploration, there is no guarantee of success--even less so with cutbacks. With existing oil production worldwide declining around 4 to 5 percent per year, the industry already had a huge task keeping production growth just barely positive. Now, that will be almost impossible if oil prices remain low.

What that means is supply will likely stagnate or even shrink. Barring a deep and prolonged economic slump now (which would send oil prices even lower and keep them there for some time), as demand for oil reignites, we're setting up for another big price spike later that might then send the economy off a cliff into a serious slide.

For now, those in the renewable energy business are finding it more difficult to be competitive with lower-cost oil. Energy efficiency business owners must tell their clients that many efficiency measures will have a longer payback period while oil prices stay low. Both these outcomes send us in the wrong direction.

And, there is climate change. When petroleum products are cheap, there is less incentive to use them parsimoniously. All things being equal, that means more oil products are burned which produces additional greenhouse gas emissions.

Now, regarding the financial consequences of low oil prices, one could say, "Well, if you've chosen to work in the oil industry or if you've staked your whole country's future on the price of oil, then that's just your tough luck. Some of the wealth that flowed to you is now going to start to flow back to me."

And therein lies a problem. If that money flows too quickly away from the oil industry and the major oil exporters, it could create a financial cascade in the debt markets, in the world's stock markets, in the currency markets--oh wait, it already has. The question is how far will these disruptions carry, and will they cascade in a way that leads to a recession or depression.

One can be passive in the face of such events. But, a smarter plan would be to implement something along the lines I proposed last week--an oil tariff that keeps prices high and so keeps renewables and energy efficiency attractive. In fact, a system that keeps all carbon-based fuels high-priced would do more to move the world toward a sustainable energy system than all the current renewable energy subsidies combined. And, it would prevent the kind of price manipulation now engaged in by OPEC from wrecking havoc on any plan to move toward a renewable energy society.

It is just such disruptions in the fossil fuel markets that make us believe things that aren't good for us--that we can somehow burn cheap oil and forget about climate change. That cheap oil will go on forever. That cheap oil is a sign that the marketplace solves all problems (rather than creating new problems that it can't solve by itself).

We can celebrate lower gasoline, diesel and heating oil prices now. But like any overindulgence, we will pay for it later. When a pusher offers a junkie a discount on his drugs, we shouldn't take it as an act of kindness.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, December 07, 2014

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.

The easiest way to achieve the floor price, of course, would be to slap a sliding tariff on imported oil. The formula for such a tariff would be simple: The floor price minus the price of imported oil unless the price of imported oil equals or exceeds the floor price, in which case, the tariff would be zero. Imposing a tariff that keeps U.S. oil prices above, say, $100 per barrel would only return the domestic price of gasoline and other refined products to their level of just six months ago. Presumably, that wouldn't be much of a shock to consumers.

I suspect, however, that Kissinger's proposal would be about as popular today as it was when he proposed it. Back in 1975, it never got off the ground. This was, in part, because the Europeans and the Japanese objected that, unlike Americans, the two had few oil resources that might be exploited as a result of such a price guarantee. In the end, America was unwilling to go it alone.

Ironically, since that time the Europeans and the Japanese have opted for high taxes on energy including motor fuels--taxes that have had the effect of achieving Kissinger's objectives two and three, alternative energy development and energy conservation. Americans have maintained low energy taxes which in part are responsible for the fact that the average American uses twice as much energy as the average European.

An oil tariff could actually garner considerable well-heeled, heavyweight political support from two unlikely bedfellows: the domestic oil industry and the renewable energy industry. The domestic oil industry, of course, would love a tariff because it protects the industry's high-cost deep shale deposits from the competition of cheap OPEC oil imports. The cartel's price suppression strategy specifically targets the high-cost hydraulic fracturing or fracking in deep shale deposits that has been largely responsible for the rise in U.S. oil production from a low of 5 million barrels per day (mbpd) in 2008 to 8.8 mbpd as of September this year.

The renewable energy industry might well join the oil industry in supporting such a tariff because a high oil price makes alternatives to oil more attractive.

But individual, commercial and industrial consumers of oil and oil products would object to higher prices. Industrial users, in particular, would complain that they must compete against other industries abroad that pay less for their petroleum products (though this might not be true in such high-tax places as Europe).

Another group would almost certainly object to such a tariff: those concerned about the environmental damage associated with fracking for oil. High domestic oil prices would only encourage exploitation of more deep shale deposits across America, and that would necessarily result in broader environmental effects. These activists might well argue that a hefty carbon which would tax oil and all other carbon energy sources would be better targeted for reducing energy consumption and spurring alternatives to fossil fuels--with no need for an import tariff that encourages domestic oil production. But, recent history suggests that such a tax remains politically implausible. So, the question is: If the tariff were to be adopted, would the support provided to alternative energy be an acceptable trade for the damage done to the landscape?

Of course, anti-fracking activists will retort that they'd like to ban fracking altogether while the country speeds up deployment of alternative energy. But, the chances for such a ban, either federal or state, while not zero, are probably smaller than the chances that the United States will enact an oil tariff.

The beauty of the oil tariff is threefold: 1) The mechanism for collecting it is already in place. 2) It doesn't mandate exactly how people should go about reducing their petroleum use; it only incentivizes them to do so. And, 3) it makes significant headway in addressing one of America's greatest vulnerabilities, our dependence on foreign oil and on fossil fuels in general. We'd get all this with one tax.

Getting agreement for an oil tariff would be a grand bargain of the first order. It would require a sort of Alice-through-the-looking-glass transformation across the United States. Oil industry captains--who tend to have libertarian leanings and who have consistently and publicly denounced excessive government regulation and taxes--would have to champion a new tax. The renewable energy industry would have to embrace its new partnership with the oil industry.

Environmentalists might have to be appeased with new, much stricter environmental standards for fracking and with assurances that enforcement would be vigorous. (The oil industry would look foolish opposing such standards when it is being given such a big financial gift--one that would enable it easily to pay for better environmental practices.) And, the oil-consuming industries and the public would have to take the attitude that the tariff is the right thing for the country because it will force all of us to do the right thing: conserve and seek alternatives to oil and oil products.

The most likely course, however, is that no such tariff will be adopted. As a result America's oil industry will slip into a slump. The country will become more dependent on imports and oil in general. And, when oil prices rise again--as they surely will--the industry will go right back to fracking America's deep shale deposits at full speed without any additional environmental safeguards.

Where is Lewis Carroll when you need him?

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, November 30, 2014

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.

After weeks of speculation about the true motives behind OPEC's decision to maintain production in the face of declining world demand--which has led to a major slump in oil prices--the oil cartel explicitly stated at its most recent meeting that it is trying to destroy U.S. tight oil production by making it unprofitable.

One of the things a cartel can do--if it controls enough market share--is destroy competition through a price war. Somehow the public and policymakers got fixated on OPEC's ability to restrict production in order to raise prices and forgot about its ability to flood the world market with oil and not just stabilize prices, but cause them to crash.

The industry claims that most U.S. tight oil plays are profitable below $80. And, drillers say they are driving production costs down and can weather lower prices. OPEC's move will now test these statements. The current American benchmark futures price of about $65 per barrel suggests that OPEC took into consideration the breakeven points cited in the linked article above.

It is largely Saudi Arabia which enables OPEC to have production flexibility since the kingdom maintains significant spare capacity, declared to be in the range of 1.5 to 2 million barrels per day (mbpd). OPEC says in its "World Oil Outlook 2014" that all of OPEC has about 4 mbpd of spare capacity, though one analyst recently put the number at 3.3 mbpd.

Whatever the precise number, in practical terms Saudi Arabia is the Walmart of world oil markets, able to affect a price drop at the turn of a few valves or through failure to turn them off in the face of falling demand. In this case, the country did not turn off any of its production in response to weakening world demand. Nor did other OPEC members. Having twisted enough arms in the most recent OPEC meeting, Saudi Arabia got its way with a commitment from OPEC members to hold production steady, thus putting further pressure on the oil price in the wake of falling demand. Both of the world's major oil futures contracts fell by 7 percent after the announcement.

The effect has been far greater in North Dakota than the ongoing drop in futures prices would indicate. That state, which is at the center of the U.S. tight oil boom, is far from refineries and pipelines. Oil producers use expensive rail transport to carry their oil to market. The result is that North Dakota producers face a significant discount at the wellhead. For October the average discount was $15.40 per barrel below the U.S. benchmark Light Sweet Crude futures price. If we take that discount and apply it to last Friday's close, that would imply that North Dakota producers are now receiving $50.59 per barrel--a level unlikely to be profitable except for the most prolific wells.

If prices remain that low, OPEC will almost certainly achieve its objective of preventing significant investment in new production in the state. Other major tight oil production is centered in Texas, closer to pipelines and thus not subject to discounts of this magnitude. Still, with oil around $65 per barrel, it is likely that production would rise very little in Texas in the tight oil plays, if at all. Deposits outside the "sweet spots" currently being drilled are almost certainly uneconomic at such prices.

If a prolonged low price leads to painful and permanent losses for owners of shares and bonds of the tight oil drillers--and for those invested directly in actual wells--there will be less appetite among investors to rush in even when oil prices recover. That's precisely what OPEC is counting upon. It knows that free cash flow (cash earned from operations minus capital expenditures) for independent drillers has been wildly negative since 2010. The furious drilling of the past few years has been financed largely by share issues and debt rather than earnings from previous wells.

At these new low oil prices, it's unlikely that many investors will be willing to put more money to work in the tight oil deposits of America. That will make it hard for drillers to fund new drilling since they have insufficient cash being generated by current operations. In addition, with oil prices significantly down, many independent drillers may have a hard time paying off their debts, let alone paying the costs of drilling a large number of new wells. And with yearly field production decline rates in tight oil areas of about 40 percent--which simply means that no drilling for a year would result in a 40 percent decline in production--drillers have to drill a large number of new wells just to make up for production declines in existing wells BEFORE they get to new wells that actually add to the overall rate of production. A significant drop in the rate of drilling in U.S. tight oil plays could actually result in lower overall U.S. oil production.

Lower oil prices tend to increase demand for oil as people can afford more energy for consumer and industrial purposes. So, OPEC is fully expecting demand and then prices to rise over the medium term--but not, it hopes, soon enough to bail out tight oil drillers.

All things being equal, lower oil prices tend to increase economic activity and may help Europe and Asia avoid a recession by lowering energy costs significantly. But all things may not be equal since at least one analyst believes the current rout in the oil markets could lead to cascading defaults that start with the junk bond debt of oil drillers and move through banks heavily invested in oil company debt. That, in turn, could cause a general stock market collapse. Thus, instead of promoting economic growth, low oil prices would be the cause of the next stock market crash and the next worldwide recession.

Such a recession would likely sink oil prices further, putting extreme financial pressure on OPEC members less well-endowed than Saudi Arabia. And, it would upset OPEC's timetable for a return to higher prices and profits--delaying it perhaps for years. It would also put another nail in the coffin of the American oil independence story--one that even the ever-optimistic U.S. Department of Energy never believed at high prices--by moving many of the U.S. oil plays previously considered viable into the uneconomic category.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, November 23, 2014

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.

With Russian President Vladimir Putin making a premature exit from the G-20 summit as world leaders began to discuss Russian complicity in a rebellion in eastern Ukraine, it seems likely that tensions between Western powers and Russia will escalate from here.

If they do, the threat of nuclear war will rise with them--now with several more permutations than before since the original five nuclear powers--the United States, Russia, China, France, and the United Kingdom--have now been joined by Israel, Pakistan, India, and North Korea. All of these latter entrants into the nuclear club face obvious regional tensions that could lead to a nuclear exchange, an exchange that might draw the original nuclear powers into the regional conflict.

Once again there will be talk of MAD or mutually assured destruction, an apt acronym for a doctrine that assumes that the fear of nuclear annihilation (from a retaliatory attack) has prevented and will prevent the first-strike use of nuclear weapons by both the Americans and Russians (and everyone else).

And, with new nuclear players on the stage, there will undoubtedly be talk of "limited" nuclear war. There was a serious discussion about such a limited war between the United States and the Soviet Union in the 1950s and 1960s. Proponents of a first-strike attack claimed that the United States could win such an exchange (whatever that means).

The problem with that thinking is that it fails to take into account just how interconnected the various parts of our global system are now. Even back in 1954, Harrison Brown, author of "The Challenge of Man's Future," put it this way as he thought about such an outcome:

Once a machine civilization has been in operation for some time, the lives of the people within the society become dependent upon the machines. The vast interlocking industrial network provides them with food, vaccines, antibiotics, and hospitals. If such a population should suddenly be deprived of a substantial fraction of its machines and forced to revert to an agrarian society, the resultant havoc would be enormous. Indeed, it is quite possible that a society within which there has been little natural selection based upon disease resistance for several generations, a society in which the people have come to depend increasingly upon surgery for repairs during early life and where there is little natural selection operating among women, relative to the ability to bear children--such a society could easily become extinct in a relatively short time following the disruption of the machine network.

The modern global economy is like a shark; it has to move forward or it dies. The widespread adoption of just-in-time inventory has resulted in acute vulnerabilities from even very short disruptions. The modern global machine now requires continuous inputs of energy and materials and continuously operating global freight transportation or it starts to break down.

Even partial destruction, say, 15 to 20 percent of the industrial plant in the world, might be enough to make the global economic system inoperable. Because self-sufficiency has become a dirty word in our free-trade crazed political culture, countries have become so specialized in their manufacturing that it might not be possible to reproduce the necessary facilities nearer home quickly enough to prevent a global systemic breakdown. We would not simply revert back to the level of economic activity of, say, the 1950s. Instead, we could experience a total breakdown that leads to our inability to restart modern technical civilization after even a limited nuclear war.

One of the most troublesome effects of a nuclear attack is that it can render some or all of the electrical infrastructure inoperable through something called EMP or electromagnetic pulse. This pulse is discharged by every atomic explosion and can cripple transformers throughout the electrical grid. And, just one or two bombs exploded at high altitude could affect the entire United States or Europe; therefore, an EMP-focused nuclear attack is within the reach of the smallest nuclear power.

There is no vast ready supply of transformers to replace damaged ones. New transformers are expensive and require a year and a working electrical infrastructure to make. This is just one of the many loops in our current system that cannot be disengaged without great peril.

Our ability to mine basic minerals is now entirely dependent on an existing industrial infrastructure that can supply machines and undertake chemical processes to extract minerals from the very low grades of ore that remain (since we've already managed to mine all the high-grade stuff). Our ability to grow food depends largely on that same industrial infrastructure which produces machinery, chemicals, and fertilizers all necessary to modern farming and which provides the transportation and processing facilities. Without that infrastructure, the world's farmers could feed only a small portion of those alive today.

And, we should remember that all this could happen unintentionally if the machines which control nuclear military operations malfunction--or if a rogue commander decides on his own that nuclear war has become necessary. If an attack is the result of a mechanical failure, can the side being attacked really be convinced that the attack is a mistake? If the attack is by a rogue commander, would representations by a civilian leader that the commander was not authorized merely be seen as gamesmanship and part of an overall attack plan?

For a dramatic presentation of the malfunction scenario, one need only reach back to the middle of the last Cold War for the book and film entitled "Fail-Safe." For the rogue commander scenario treated with dark humor, see director Stanley Kubrick's "Dr. Strangelove or How I Learned to Stop Worrying and Love the Bomb." For a strictly dramatic presentation of the rogue commander scenario, let me suggest the film "Seven Days in May" from the same era.

The danger of nuclear war didn't really go away at the end of the last Cold War. It has simply been out of view as other problems took precedence. Now we are once again forced to contemplate it. No matter how remote the possibility of such a war may seem to us, its severity demands our attention--and our efforts to prevent it.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, November 16, 2014

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.

The problem has been that overproduction and low prices--now only a fraction of the $13 per thousand cubic feet (mcf) at the peak in 2008--have undermined the financial stability of the natural gas drillers. Here's why: Natural gas from shale, referred to as shale gas, is generally more expensive to produce than conventional natural gas and will require that natural gas prices go much higher than they are today--from around $4 per mcf almost certainly to over $6 per mcf and perhaps more to pay the costs of bringing that gas out profitably.

But at that price, U.S. LNG is no longer competitive in Europe. And now, because of the Russian-Chinese natural gas pipeline deals, it may no longer be competitive in Asia. Those are the two largest markets for LNG. Without them it is doubtful that the United States will be exporting much LNG--except perhaps at a loss.

Here's the problem: To convert U.S. natural gas to liquefied natural gas, put it on specially built tankers and ship it to Europe or Asia will cost about $6 per mcf. If the price of U.S. natural gas averages around $6 per mcf, the total landed cost of U.S. LNG will be the cost of the gas plus the cost of converting it and shipping it, that is, around $12 per mcf.

The most recent landed prices for LNG to Asia as reported by the Federal Energy Regulatory Commission were $10.10 per MMBtu* for China, $10.50 for Korea and $10.50 for Japan. For Europe the numbers are even more sobering: $9.15 for Spain, $6.60 for the United Kingdom, and $6.78 for Belgium. All amounts are U.S. dollars.

These are probably reflective of spot prices rather than long-term contracts, and they are down due to softening energy demand that may be the result of an economic slowdown in Asia and Europe.

But, they give an indication of how difficult it will be for U.S. LNG to compete on the world market. LNG prices may well improve, but buyers of LNG typically sign cost-plus contracts. In the United States that would be the cost of Henry Hub natural gas (traded on the New York Mercantile Exchange) plus the cost of liquefaction and transportation. With no assurances--and a good deal of evidence to the contrary--that Henry Hub gas will remain at current prices (around $4) for the long term, it's difficult to see how there will be many long-term buyers of U.S. LNG.

One wonders under such circumstances just how many of the 14 proposed U.S. LNG export terminals will actually be built.

Having taken the long way around, let me return to the Russian-Chinese natural gas pipelines and their significance in this drama. Gazprom, the Russian natural gas giant that will actually deliver the gas, valued the earlier deal in May at around $10.19 per MMBtu. The latest deal has no announced value, but one analyst believes the Chinese will be asking for around $8 per MMBtu. Even if the Chinese end up accepting a price closer to the previous deal, some 17 percent of the Chinese natural gas supply will be coming from Russia when the pipelines are complete several years from now. And that will likely anchor the price of Chinese LNG imports between $10 and $11 per MMBtu, making the price too low to be reliably profitable for U.S. LNG exporters.

The implication is that today's soft prices for imported LNG to China and the rest of Asia may become the norm in a few years just as America's LNG export terminals are about to become operational. If investors fund these terminals and the Russian-Chinese pipelines get built, there is likely to be some epic capital destruction on the American side of the Pacific.

There are other reasons to be skeptical about America's future as a natural gas exporter. The rosy predictions of the industry and the U.S. Department of Energy for domestic natural gas production from shale may be overblown according to a new report from the same analyst who foresaw the massive downgrade of recoverable oil from California's Monterey Shale. Despite rising domestic natural gas production, the United States remains a net importer of natural gas. Natural gas imports accounted for about 10 percent of U.S. consumption through August of this year.

(Full disclosure: I worked as a paid consultant to help publicize the report mentioned above. But, as longtime readers know, since 2008 I've been skeptical about the wild claims of a long-term U.S. bonanza in oil and natural gas due to shale deposits. This report offers the first comprehensive analysis based on industry data and is produced independent of industry influence or money. Anyone with a stake in the industry or in U.S. energy policy should read it.)

It's possible that some U.S. LNG export projects may move forward in any case. If the buyers for this LNG sign long-term, cost-plus contracts as described above, those buyers will be in for a big surprise when U.S. natural gas prices rise. And those exports will create something of a self-reinforcing feedback loop by raising overall demand which will hoist domestic prices even higher for U.S. natural gas--even more so if there is not as much U.S. production as is currently being projected. If U.S. natural gas production remains at or below the level of domestic consumption, the United States could be faced with the rather bizarre prospect of having to import high-priced LNG from some countries to fill the gap created by LNG export shipments committed to others.

Higher U.S. natural gas prices will be a double-edged sword for those concerned about a cleaner energy future. U.S. natural gas producers and renewable energy companies will simultaneously rejoice if exports raise prices appreciably--producers because their financial fortunes will turn more positive and renewable energy companies because renewable energy will become more competitive with higher priced natural gas. Environmentalists, however, will gasp in horror as profitability rises enough in the shale gas fields to justify ever greater encroachments on the American landscape.

And, U.S. politicians who favor LNG exports may ultimately find themselves pilloried by consumers who must pay those higher prices and environmentalists who abhor the environmental costs--even as those politicians watch the campaign contributions flood in from a grateful shale gas industry.

______________________________________________________________________

*MMbtu stands for 1 million British thermal units, a measure of heat content. Mcf, of course, means 1,000 cubic feet. This much natural gas contains almost 1 million Btus--975,610 to be precise. And so, the two measurements are often used interchangeably when comparing price though they are not precisely equivalent.

UPDATED: November 17, 2014 to include information on U.S. natural gas imports.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, November 09, 2014

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.

Vermont has passed a labeling law that would not require other states to act. But the law is being challenged by the GMO industry in court. If it survives that challenge--which is not at all certain--then its implementation could end up being the one win which the labeling advocates need to create a cascade of labeling requirements elsewhere and the acquiescence of much of the food industry. On the other hand, even if Vermont ultimately prevails in court, the suit could result in lengthy delays in the implementation of the law and mean that the first genuine implementation of GMO food labeling takes place elsewhere.

What complicates matters further for the GMO seed companies is that an increasing number of food processors are opting to exclude GMO ingredients from their products. Many processors proudly display this choice by using the emblem of the Non-GMO Project on their foods (meaning that their GMO-free formulation has actually been verified).

Many others will find ways to eliminate GMO ingredients, especially if they represent a small proportion of the total for any product, just to avoid mandatory labeling.

All this means that as the momentum for labeling continues to build, the opponents of labeling will have fewer and fewer allies. And, if just one state adopts labeling, those allies will shrink appreciably as more and more food processors abandon the GMO bandwagon just to avoid the labeling requirement.

The other problem for the GMO purveyors is that the anti-GMO forces win even when they lose. With each ballot initiative the public gets a months-long education in the debate over the safety, utility and environmental consequences of GMO crops. The public is given broad information about what crops are genetically modified and which foods contain them. In the process, the GMO seed producers must take the position that they don't want the public to know which foods contain GMO ingredients. It's ultimately a losing position. An alert consumer will simply ask, "Why don't they want me to know?" And, that leads to all sorts of suspicions, both justified and unjustified.

Now, when Intel sells its chipsets to computer manufacturers, it wants the consumer to know that there's "Intel Inside." It's a big selling point! Godiva wants you to know all about how it makes its chocolate and where it comes from. But GMO seed companies--so proud of their technology on their websites--don't want you to know a thing about that technology when it makes its way onto your grocery store shelves.

One seed company executive summarized the reason perfectly all the way back in 1994: "If you put a label on genetically engineered food, you might as well put a skull and crossbones on it." The obvious question is: "What does he know that we don't?"

Here is the bind that the GMO seed companies are in. They went to the U.S. Patent and Trademark Office and filed patents that said each of their seeds is unique and therefore deserving of patent protection. The patent office agreed. Then, the companies marched over to the U.S. Food and Drug Administration (FDA) and said that their seeds don't need any special approval because the seeds are "substantially equivalent" to their non-GMO counterparts.

So, if these seeds are "substantially equivalent," then how can they be patented? The answer has to be that they are not equivalent, but unique. FDA scientists balked at the equivalence idea when they first reviewed requests from the companies for a waiver on testing. The scientists recommended that GMO foods be tested for safety just as new drugs are. After all, how can you actually know if something is substantially equivalent until you actually test it? In the end, however, politics overrode science.

Well-meaning biologists tell us not to worry about GMO crops. We've been altering the genes of plants for millennia. That's true, but never in this way and never at this scale. And, that's where the true risk lies. As I've explained before, the hidden risk in GMO crops is not one individual version. It is the repeated and continuing attempts to alter the genes of crops using genes from alien species without knowing the full risks. (You can't discover all of those risks even if you test because of complex interactions with the environment and human physiology that cannot be fully identified or, even if they could be, cannot be reproduced in the laboratory.)

And, we are not moving slowly with GMO crops as a way of testing whether there might be problems. Instead, we are introducing these new seeds at breakneck speeds over vast portions of the Earth. There is the risk, however small, that some seeds will wreck havoc on the Earth's biosphere and/or produce a massive worldwide crop failure and/or damage human health among a broad population. And, the risk of crop failures is multiplied further because most modern agriculture is based on risky monoculture farming.

The apologist might say that such GMO-related risks are very small. But, that apologist cannot say that they are zero. That means we face systemic ruin if something goes wrong. And because GMO crops have the ability to create systemic ruin, the probability that that ruin will occur approaches 100 percent as more and more GMO seed varieties are introduced into the environment and the resulting foodstuffs become part of the human diet.

The argument that we have no evidence that this could happen is, first of all, false: We already have superweeds as a result of excessive use of glyphosate, the herbicide used in conjunction with soybean crops genetically engineered to resist the herbicide. Research has shown that people with Brazil nut allergies can have allergic reactions to products into which Brazil nut genes have been introduced. (The offending GMO version of soy was never marketed.) But even if there were no direct evidence, the above argument is beside the point. That's because hidden systemic risks** don't show up until you are already ruined! They can only be prevented by refraining from doing those things which pose systemic risk, a type of risk we can recognize ahead of time if we ask the right questions.

The only question now is WHEN systemic ruin caused by GMO crops will occur. Next month, next year, 100 years from now? We cannot know. But, the benefits of GMO crops cannot be weighed against their costs, if one of the costs is complete ruin. There are no benefits which justify continually risking complete catastrophe. None.

We may do something systemically risky once and get away with it. But, we cannot get away with it forever. While labeling GMO foods won't solve that problem, it will be one more step in the march toward awareness of the potentially catastrophic risks we are taking with GMO crops.
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UPDATED: November 10, 2014

*Incidentally, that should be the response to the industry's claim that labeling will send prices higher in the state with the labeling requirement. Simple fix: Just use the same label for the entire United States!

**Purely local risks can often be evaluated and are susceptible to risk management approaches. But there is no risk management solution possible for hidden systemic risks for the very reason that they are hidden. Even where local risks are hidden, we can decide to tolerate them precisely because they are local and will not bring down worldwide systems, either natural or man-made.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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, November 02, 2014

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.

After dipping briefly to around $35 per barrel at the end of 2008 in the wake of the financial crisis, the new oil bull market sent world benchmark Brent Crude to a daily average of more than $100 per barrel for all of 2011, 2012 and 2013. Through October 27 the average daily price for this year has been $104.86, not all that different from the last three years.

The swift price decline of Brent Crude from $110 on July 1 to about $85 today has the media buzzing about a glut. But can oil which now trades at eight times its price in 1998--when there really was a glut--be said to be experiencing a glut now?

Certainly, there is more oil available than people are willing to pay $100 per barrel for. While there have been many explanations for the downward move in price, all we can say for sure is that recently there were more sellers than buyers; and so, the price slid as the buyers stepped away, waiting for the price to come down.

But, is this really a glut? In 1998, even what poor people were paying for oil and oil products was relatively affordable, making it easier for them to enjoy the power and comforts that cheap oil and cheap energy in general make available to individuals.

Now, the price of energy and oil, in particular, is leading some of the newly poor in Greece (made so by that country's ongoing economic depression) to seek out firewood--both legally and illegally obtained--to heat their homes instead of heating oil. The drop in vehicle miles traveled in the United States in recent years suggests that high gasoline prices are in part responsible for fewer miles traveled.

When it comes to total U.S. petroleum consumption, the top 10 weeks for consumption occurred from 2005 to 2007. The most recent consumption number (week ending October 24) remains 2 million barrels per day below the peak reading in 2005. European petroleum consumption remains in a downward trend as well. All this suggests a decline in the standard of living for most Americans and Europeans, at least, when it comes to oil and its benefits. (One colleague of mine now speaks of peak benefits from oil rather than peak oil.)

Yes, the price drop has only just occurred, and, of course, we can't expect that it will have an immediate affect on consumption. But, increased consumption would likely take the oil markets back above $100 per barrel since small changes in supply and demand tend to move the oil price sharply. At the $100 level no one would be calling the situation a glut.

The oil industry has been using the term "abundance" for years as a public relations ploy to prevent people from realizing that oil is neither cheap nor abundant anymore. But the word "glut" has produced night terrors in the minds of oil executives. "Glut" implies that investors should stay away from a market that cannot make them any money. "Abundance" is okay for industry television ads aimed at lulling the public and policymakers to sleep. But, "glut" is bad for business.

The real problem is that it is costing more and more to get the oil that remains out of the ground. Consumers will buy oil depending on their ability to pay, not on the price which the oil companies need to charge in order to cover the cost of producing it.

Ironically, the swoon in oil prices could easily lead to renewed price spikes as the price falls below the cost of producing the most expensive barrels of oil. Under such conditions, the industry will stop producing these barrels and supply will decline--leading to another price spike when demand picks up.

It turns out that between consumers who can't afford to pay higher and higher oil prices and companies which can't afford to produce the extra oil we'd like at lower prices, we are stuck in an ever-shrinking no man's land, a price band really--one that will eventually disappear as the average cost of producing the extra barrel of oil the world desires goes beyond what consumers including businesses can and will pay.

That will have us wondering why we allowed ourselves to sleepwalk through the last few years, even as continuing high prices and consumption declines sounded the alarm--one that told us we needed to speed up a transition to a renewable energy economy and reduce our energy use wherever possible instead of falling for talk of "abundance" and "glut."

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and 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.