November 9, 2011 at 11:05 am #2066
Five challenges facing the energy sector in 2012
Reuters Nov 7, 011 10:16 AM ET | Last Updated: Nov 8, 2011 8:29 AM ET
By John Kemp
Global energy markets stand at a crossroads. The big themes that dominated the opening years of the century (prosperity, markets, peak oil, global warming and clean technology) are giving way to a different set of concerns centered on inequality, affordability, regulation and techniques for extracting oil and gas from tight rock formations and ever-deeper below the surface.
Some changes have come from outside the energy industry. The financial crisis has diminished confidence in free markets. Falling real incomes and rising unemployment in the advanced economies have pushed climate concerns into the background in favour of a focus on jobs and cutting household bills.
Other changes have come from within the energy markets. A decade of soaring real oil prices is at last beginning to transform the long-neglected supply side of the industry, encouraging widespread employment of technologies such as ultra-deepwater drilling and hydraulic fracturing to extend conventional oil and gas reserves.
High prices have begun to concentrate consumers minds on cutting consumption. But they are also sapping support for expensive policies to remake the electricity industry by switching from burning coal and natural gas to alternatives such as solar and wind.
In the emerging world, rising oil and gas prices have brought an enormous influx of wealth for producing countries, though in many cases the inequitable distribution of income is contributing to political unrest. For consuming countries, however, the mounting financial burden, mostly aimed at the middle class, is straining government budgets and may prove unsustainable in the long run.
POLITICS NOT ECONOMICS
At the root of all these issues are political rather than economic questions. There will be no shortage of oil, gas or power in the next two decades. But policymakers and voters are being forced to confront uncomfortable questions about what sort of energy industry we want in future.
Do we want a clean, green system that stems the increase in emissions and limits the greenhouse effect, even if it proves very costly to build? Or do we want maximise availability of affordable oil and gas, even if it means climate change goes unaddressed and extraction moves into sensitive areas of wilderness and under built up areas?
In reality politicians and voters want both: cheap energy and environmental responsibility. But it may not be possible. For now, voters preferences seem to be shifting from consciousness about the environment towards worries about affordability.
Nowhere is the dilemma clearer than in the United States, where the political system is exquisitely sensitive to voters concerns, in all their contradictions and ambiguity.
Proposals for national cap-and-trade collapsed in 2010 and have vanished from the agenda. The Environmental Protection Agencys plans for emission controls have been diluted and postponed in the face of fierce lobbying from industry, intense congressional hostility and weakening support from the White House.
President Barack Obamas equivocation about whether to grant a permit for the Keystone XL pipeline is emblematic of contradictory pressures on policymakers.
Interviewed this week, the president stalled: We want to make sure were taking the long view on these issues.
Folks in Nebraska, like folks all across the country, arent going to say to themselves, Were going to take a few thousand jobs [constructing the pipeline] if it means our kids are potentially drinking water that could damage their health, which seemed to indicate that he was leaning against the project.
But he noted theres a way of doing that and making sure the health and safety of the people of Nebraska are protected. And thats how Ill be measuring these recommendations when they come to me. So the president has carefully left all his options open.
FIVE ISSUES FOR 2012 AND BEYOND
In the next few weeks, the main forecasting agencies and top analysts will finalise their supply-demand-price predictions for oil and gas in 2012.
I will leave detailed supply-demand balances to the barrel counters, since I have no comparative advantage over them. But the most important part of forecasting comes after the projections have been made and consists of asking two related questions: (a) what assumptions underlie the forecast and how might they turn out to be wrong; and (b) what has the forecast missed?
There are at least five issues shaping the outlook for energy markets and prices in 2012 and beyond which market participants, investors and policymakers need to think about carefully:
Will emerging markets follow the advanced economies in reducing the energy-intensity of their growth, bending the oil consumption curve downwards?
Emerging markets now account for all marginal consumption growth. Many of the most populous are entering the stage of development where consumption, especially for transport fuels, is likely to rise very rapidly. So further increases in per capita consumption are inevitable. But it makes an enormous difference whether the rate of growth can be tempered by efficiency improvements.
In many economies, fuel and power prices are controlled or extensively subsidised, blunting incentives to adopt more efficient technologies. Subsidies chiefly benefit the politically influential middle class as well as favoured groups such as farmers, so they are hard to remove. Nonetheless, removing them is essential, or they will undermine budget and current account balances, and threaten international competitiveness.
CHALLENGE #2Will higher prices spur a faster rise in conventional oil supplies or will price increases be swallowed up by increasing costs? Dramatic price rises have so far failed to produce a faster increase in non-OPEC output. Lack of spare capacity has left the market permanently worried about disruptions such as Libya and production problems in the North Sea.
But there is now a significant increase in investment and exploration and production activity. The question is how quickly that will translate into enhanced volumes of oil and gas, and at what sort of costs and prices? Costs have risen tremendously across the industry, but there are also signs of technological innovation, rising capacity and learning-by-doing that may bear down on costs in future.
Will hydraulic fracturing and horizontal drilling be allowed to revolutionise the global oil and gas industries? Fracking has already transformed the North American gas market and has resulted in an oil boom in North Dakota. But elsewhere the technology is running into increasing opposition.
France has banned its use. In the United Kingdom and in the United States it has been blamed for triggering (small) earthquakes. Fears about groundwater contamination and the visual and environmental impact of surface facilities could also limit political acceptability and the widespread deployment of the technology. The reserves and the technical ability to get at them are there, but the political acceptability is questionable.
Will tougher regulation affect the volume of activity and prices in commodity markets? Both physical and derivatives markets face heightened scrutiny and tighter controls in 2012. The precise impact remains unclear and fiercely disputed. But there is no doubt the political climate for commodity trading and speculation has turned more hostile over the last four years, with an ambiguous effect on price signals.
Depending on a successful court challenge, tougher position limits may be imposed in the United States. The European Union is set to introduce what it terms enhanced position management. Swap transactions will have to be registered for the first time, and there will be tougher requirements on capital, clearing and margining.
Will efforts to curb greenhouse emissions be quietly shelved? The main elements of climate policy are in trouble. The Kyoto Protocol set to expire, and carbon markets and emission offsets are in rapid retreat.
Isolated efficiency and climate change programmes continue but there are mounting questions around their political sustainability. The key question is what price politicians and voters are prepared to pay to invest in a cleaner energy system, and if they balk will it put upward pressure on long-term oil and gas prices.
November 9, 2011 at 11:05 am #4845
This article mentions but doesn’t clarify that Environmentalist & Politicians’ seem be only ones still fighting the battle for expensive & over-regulated energy approaches.
Clean Energy is more about Politics’ & Environmental than it is about Economics – a bitter pill when current depressed & jobless state US economy is direct result of following this failed & California led example.
The extended recession and deflated boom economics make it finally necessary to explain that it IS an expensive choice to keep on this tract – US cannot have both affordable/cheap & plentiful energy and clean green & environmentally neutral energy. Both Government/EPA & Environmentalist have lied to US population for years that we can have both knowing it was not true. Most of regulation on US mfg that have closed plants or relocated them to Koyoto exempted China/India/Russia plants, have not improved the environment but instead made energy more expensive so that partially subsidized Green energy can be forced in as substitute.
As article mentions – Koyoto is almost a loss cause in 2012 as carbon markets retreat and emission offsets are shown to be EU trading scam not emission reduction tool. Koyoto Protocol has been proven to be enormous failure since none 18 signature countries have made any goals since thru 2010 and never stood chance for 2012+. The exempted “Developing Countries” are now the world leaders in pollution : China #1/Russia #5/India #7 and the flat gains…..even at extreme cost and loss of manufactured export products by “Developed Countries” remained flat on emissions. Japan, Canada have already vowed to veto new attempts 2012 unless China & India & other developed countries are made to follow same rules. Even Environmentalist have changed “Global Warming” to “Climate Change” as Real Climate Science prove the Man based drivers are untrue and exaggerated.
I wonder what people would do if you produced the gasoline/diesel cost breakdown with not just taxes but environmental regulation cost elements to show just how much more impact these have had than “Evil Oil Price Gouging & Profit Taking”. A short time when gas cleared the $3-4/gallon level Gas Stations showed tax breakout at few station pumps & were routinely put in presentations – the Refineries got lot good press from doing this. Needs go step further especially in state like California leading all regulation problems (like current Carbon Tax). We know California led : removal lead, Vapor Pressure limits, Requirement Oxygenates, Low Sulfur Fuels, removal MTBE and other regulations have California paying over $1.50/gal than rest country & whole US paying $2/gal more than without these regulations. And that it and other me-too states have created over 14 different gasoline specs that make most US gasoline unfungible/available for other regions (limit 4-6 types to stay “fungible”)
You must be logged in to reply to this topic.