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Fuel Freedom Staff

New York Times launches series looking at N.D. oil industry

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You won’t be fully up to speed on how oil production, and hydraulic fracturing, has transformed the rural communities of North Dakota unless you read Deborah Sontag’s exhaustive piece in The New York Times.

Sunday’s Part I of a series, “The Downside of the Boom,” includes video, satellite maps and other visuals to complement its reporting.

At the heart of Part I is the way land has been “sliced and diced” in North Dakota for years, and rights to the surface don’t necessarily mean the landowner has control over the resources that lie beneath.

Given that mineral rights trump surface rights, this made many residents of western North Dakota feel trampled once the boom began.

In 2006, a land man for Marathon Oil offered to lease the Schwalbe siblings’ 480 acres of minerals for $100 an acre plus royalties on every sixth barrel of oil.

“Within a few years, people were getting 20, 30 times that and every fifth barrel,” Mr. Schwalbe said. But the Schwalbes did not expect “to see any oil come up out of that ground in our lifetime.”

Oil companies were just starting to combine horizontal drilling with hydraulic fracturing to tap into the mother lode of Bakken oil. “We didn’t really know yet about fracking,” he said.

The Schwalbes’ first well was drilled in 2008, their second the next year. Powerless to block the development, Mr. Schwalbe and his wife, nearing retirement, took some comfort in the extra income, the few thousand dollars a month.

Then that was threatened, too.

Fuel Freedom Staff

EPA delays decision on whether to reduce ethanol in gas

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The federal government’s new threshold for the amount of ethanol blended into America’s gasoline supply was already 10 months overdue. So officials have gone ahead and delayed the decision further, into 2015.

The Environmental Protection Agency announced Friday that it would defer an announcement on the renewable fuel standard (RFS), which stipulates that ethanol should make up 10 percent of gasoline.

(The Des Moines Register has some of the day’s best reporting on this issue. Agriculture.com also has a good explanation of the granular details.)

The standard, first established under a 2005 law, calls for the amount of renewable fuels in gasoline to progressively increase each year. But the law was written at a time when demand for gasoline was expected to keep going up. Slackened demand around the world, combined with stepped-up U.S. production, has dropped domestic prices below $3 a gallon.

Based on that reality, the EPA recommended, in November 2013, that the amount of corn ethanol in the should be reduced, from 14.4 billion gallons a year to 13.01 billion gallons.

This upset the corn growers and ethanol producers, most of them clustered in the Midwest and Great Plains. They said the delays deterred investment in biofuels, and even the oil companies complained that the regulatory vacuum created too much uncertainty in the fuels market.

The EPA’s recommendations had not been finalized. They had been sent to the White House Office of Budget and Management for review, but that office “ran out the 90-day clock to review the agency’s proposed standards, which for the first time signaled a retreat by the EPA on the percentage of biofuels that must be blended,” The Hill reported.

Since the EPA was already so late in setting the 2014 guidelines, the agency “intends to get back on track next year, though details on how it would do that weren’t available Friday,” The Wall Street Journal wrote. The EPA statement said: “Looking forward, one of EPA’s objectives is to get back on the annual statutory timeline by addressing 2014, 2015, and 2016 standards in the next calendar year.”

The reaction among the affected parties was mixed Friday. The WSJ tries to untangle the various interests:

The debate over the biofuels mandate triggers strange bedfellows, with trade groups representing the oil and refining companies, car manufacturers, livestock and even some environmental interests all opposed to the policy for different reasons. Proponents of the standard include the corn industry, which is the most common way ethanol is produced, and producers of ethanol.

The EPA’s announcement gave cautious hope to ethanol-industry leaders that the agency will fundamentally rethink how it proposes the annual biofuels levels. The draft 2014 biofuels levels, which the agency proposed almost a year ago, were much lower than the ethanol industry lobbied for.

“I am truly pleased that they’re pulling away from a rule that was so bad,” said Bob Dinneen, president and CEO of the Renewable Fuels Association, a trade group representing biofuels companies. “But I recognize as well we have to work with the agency to try to figure out a path forward that everybody can live with.”

Executives in the oil-refining industry criticized the delay, and said it was evidence the renewable-fuel standard was itself inherently flawed and should be repealed.

“Each year is dependent upon the previous year, and to some extent dependent upon the following year,” said Charlie Drevna, president of the American Fuel & Petrochemical Manufacturers, a trade association representing the nation’s refining industry. “The problem is, every year EPA is late in getting this out, it exacerbates it. They’re never going to be able to catch up.”

 

Fuel Freedom Staff

Gasoline will average $2.94 in 2015, feds predict

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Are low gas prices going to stick around for a while? The U.S. government thinks so.

The federal Energy Information Administration issued its monthly report on Thursday, and it predicts that gasoline will remain below $3 a gallon throughout 2015.

Specifically, gas prices will average $2.94 in the new year, 45 cents cheaper than this year. That will let consumers keep a total of about $61 million in their collective pockets.

According to AP:

That may not seem like a lot in the context of a $17.5 trillion U.S. economy, but economists say it matters because it immediately gives consumers more money to spend on other things. Consumer spending accounts for 70 percent of the U.S. economy.

“It would be a reversal of the trend over the last few years where consumers can’t stretch a dollar far enough,” says Tim Quinlan, an economist at Wells Fargo.

Quinlan says the price of gasoline is one of the three big drivers of consumer confidence, along with stock prices and the unemployment rate. “Lately all three are moving in the right direction,” he says.

Energy analyst Michael Lynch, writing in Forbes, acknowledges that “Some will scoff at the drastic change in the forecast, arguing that such a big revision cannot be credible, and that an economic recovery next year should bring higher prices.”

But analysts usually make predictions based on the current price of oil, and don’t predict wild swings one way or the other. However, increased global supply should keep prices down in 2015, according to Lynch’s own analysis:

A strong global economy next year, combined with slowing shale oil production growth and/or instability in Libyan production should tighten markets, but might not raise prices much, certainly not to $100 a barrel. And a diplomatic agreement with Iran that ends sanctions, combined with rising Iraqi and Kurdish production, will probably turn $80 into the new price ceiling. Longer run, I remain an outlier with a firm belief that even $80 a barrel cannot be sustained in the wake of rising global oil supply.

Fuel Freedom Staff

As lighter F-150s roll out, Ford CEO says buyers care about fuel economy

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The price of gas rises and falls in cycles, but buyers of the Ford F-150, the best-selling vehicle in the United States the past three decades, have consistently had one complaint: the poor fuel economy of the truck.

Ford Motor Co. CEO Mark Fields thinks the company has solved that problem with the 2015 model F-150 now rolling off the assembly line at Ford’s plant in Dearborn, Mich. The new version is 700 pounds lighter, owing to the body consisting almost exclusively of aluminum, instead of heavier steel.

Although the truck’s gas-mileage figures won’t be announced by the company until later this month, AP’s story notes:

The company says the 2015 truck will have from 5 percent to 20 percent better fuel economy than the current version, which gets up to 23 mpg. A figure in the higher end of that range might convince some buyers to switch brands, says Jesse Toprak, chief sales analyst for the car buying site Cars.com.

Fields told CNBC’s “Squawk Box” program that better fuel efficiency has been the “biggest customer unmet need, the biggest dissatisfier” in the past.

What about the effect cheap gasoline has on buyer behavior? He was asked whether consumers care less about fuel economy when gasoline is as cheap as it has suddenly become — around $3 a gallon, or even less in some places.

“They’re much smarter these days,” Fields said, adding that prices are volatile. “Our long-term view is, over time, the price of a barrel of oil is gonna go up. It’s a non-renewable resource.”

(Photo: Ford Motor Co.)

Fuel Freedom Staff

CNNMoney: $3 gasoline can’t last

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CNNMoney’s Ivana Kottasova has a post today about the International Energy Agency’s warning about oil prices being too low:

It says plunging oil prices will damage the U.S. shale oil boom and cause supply problems down the road.

Oil prices have dropped by 30% in the past four months, putting oil producers under pressure. The low prices could deter investment in production, which will eventually hurt supply, the agency’s chief economist Fatih Birol said.

In its latest outlook, the IEA did say that lower oil prices could could help oil importing countries and their economies and even lead to increased demand.

But higher prices were needed to ensure future energy security.

Arctic Leaf

10 reasons why falling oil prices is good for the U.S. and replacement fuels

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While they might not make the Late Show with David Letterman, here are ten reasons why the fall in oil and gas prices, if it is sustained for a while, is, on balance, good for the U.S. and replacement fuels.

  1. U.S. consumers are getting a price break. While the numbers differ by researchers, most indicate that on average they have saved near $80 billion. According to The Wall Street Journal, every one cent drop in gasoline adds approximately a billion dollars to nationwide household consumption.
  2. Low- and moderate-income households will have extra money for basic goods and services, including housing, health care and transportation to work.
  3. Increased consumer spending will be good for the economy and overall job growth. Because of the slowdown in production and the loss of jobs in the oil shale areas and Alaska, the net positive impact on GNP will be relatively small, higher at first as consumers make larger purchases, and then lower as oil field economic declines are reflected in GNP.
  4. Low prices for oil and gas will impede drilling in tight oil areas and give the nation time to develop much-needed regulations to protect environmentally sensitive areas. Oil is now under $80 a barrel. The price is getting close to the cost of drilling. Comments from producers and oil experts seem to suggest that $70-75 per barrel would begin to generate negative risk analyses.
  5. Low prices for oil and gas will make it tough on Russia to avoid the impact of U.S. and EU sanctions. Russia needs to export oil and gas to secure revenue to meet budget constraints. Its drilling and distribution costs will remain higher than current low global and U.S. prices.
  6. Low prices of oil and gas will reduce U.S. need to import oil and help improve U.S. balance of payments. Imports now are about 30 percent of oil used in the nation.
  7. Low prices of oil and gas will further reduce dependence on Middle East oil and enhance U.S. security as well as reduce the need to rely on military intervention. While the Saudis and allies in OPEC may try to undercut the price of oil per barrel in the U.S., it is not likely that they can sustain a lower cost and meet domestic budget needs.
  8. Low prices of oil and gas will create tension within OPEC. Some nations desiring to improve market share may desire to keep oil prices low to sustain market share, others may want to increase prices and production to sustain, if not increase, revenue.
  9. Low prices of oil and gas will spur growth in developing economies.
  10. Low prices for oil and gas will likely secure oil company interests in alternative fuels. It may also compel coalitions of environmentalists and others concerned with emissions and other pollutants to push for open fuel markets and natural gas based ethanol, methanol and cellulosic-based fuels as well as a range of renewable fuels.

We haven’t reached fuel Nirvana. The differential between gasoline and corn-based E85 has lessened in most areas of the nation and now appears less than the 20-23 percent needed to get consumers to think about switching to alternative fuels like E85. But cheaper replacement fuels appear on the horizon (e.g., natural gas-based ethanol) and competition in the supply chain likely will reduce their prices. Significantly, in terms of alternative replacement fuels, oil and gas prices are likely to increase relatively soon, because of: continuing tensions in the Middle East, a change of heart on the part of the Saudis concerning maintaining low prices, the increased cost of drilling for tight oil and slow improvements in the U.S. economy resulting in increased demand. The recent decline in hybrid, plug-in and electric car sales in the U.S. follows historical patterns. Cheap gas or perceived cheap gas causes some Americans to switch to larger vehicles (e.g., SUVs) and, understandably, for some, to temporarily forget environmental objectives. But, paraphrasing and editing Gov. Schwarzenegger’s admonition or warning in one of his films, unfortunately high gas prices “will be back…” and early responders to the decline of gasoline prices may end up with hard-to-sell, older, gas-guzzling dinosaurs — unless, of course, they are flex-fuel vehicles.

Fuel Freedom Staff

Official: $70 oil will cause ‘panic in OPEC’

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Since the oil plunge began in June, speculation has been rampant that the Organization of the Petroleum Exporting Countries might act to cut production to keep prices from falling further.

The 12-member OPEC cartel is due to meet Nov. 27 for a regularly scheduled meeting. But some officials with the group, meeting informally this week in Vienna, told The Wall Street Journal that a per-barrel price of $70 — from the current level of about $80 — would trigger action.

The paper’s story Friday said:

“At $70 a barrel, there will be panic in OPEC. We have become used to living with $100 a barrel,” said one OPEC official, speaking on the sidelines of the meeting.

Fuel Freedom Staff

Chevron’s influence fails to sway voters in Richmond, Calif.

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Chevron spent more than $3 million to back three candidates for city council in Richmond, Calif. But voters rejected all three, in favor of candidates who have been critical of the oil giant, which is the largest taxpayer and employer in the Northern California city.

Richmond, north of Berkely, is about 45 minutes’ drive from San Ramon, to the south, which is the headquarters for Chevron. As Al Jazeera America reports:

For years, Richmond was known in the San Francisco Bay Area simply as a hub of high crime, pollution, and poverty. Politicians here had unabashedly close ties to Chevron — until 2008, most local elected officials were sympathetic to the company, which maintained a desk in the city manager’s office through the 1990s. But city politics began to change in 2004, when McLaughlin won a city council seat and then, two years later, became mayor.

The city has since risen into the national spotlight several times, partly because of [former mayor and Green Party member Gayle] McLaughlin’s willingness to take on Chevron, which is Richmond’s largest taxpayer and employer. Last year, the city sued the refinery after a 2012 fire sent thousands to area hospitals complaining of respiratory problems. “We don’t see Chevron as the source of keeping our economy going,” McLaughlin said defiantly at the time.

In response, Chevron has gone to great lengths to try to regain public sympathy, and to oust its opponents from local office. Earlier this year, the company launched its own online news outlet, the Richmond Standard, which offers both daily stories on local events and a section called “Chevron Speaks,” where the company posts its views. In the weeks before the election, the company plastered local billboards and stuffed residents’ mailboxes with ads attacking McLaughlin and her allies and supporting candidates backed by Moving Forward, one of its Richmond-based political action committees.

The campaign tactics seemed to have backfired, because all three candidates supported by Chevron lost. Now six of the seven spots on the Richmond council belong to Chevron critics.

 

Fuel Freedom Staff

Oil exec bets on prices climbing again

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The CEO of Oklahoma City-based petroleum producer Continental Resources is so certain oil prices will rise again that the company announced it has eliminated its oil hedges for all of 2015 and 2016.

Harold G. Hamm, whose company is the biggest oil producer in North Dakota’s Bakken oil-shale play, is “basically betting the company on the belief that oil prices won’t sink much more than the 25 percent decline they’ve experienced since June,” Forbes reported.

In its press release, which , Continental said that by eliminating its outstanding hedges, it had boosted its fourth-quarter profit by $433 million.

In the release, Hamm said:

“We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand. Accordingly, we have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery. While awaiting this recovery, we have elected to maintain our current level of activity and plan to defer adding rigs in 2015.”

Arctic Leaf

It’s the oil price and cost, baby

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I began what turned out to be a highly ranked leadership program for public officials at the University of Colorado in the early ’80s, as dean of the Graduate School of Public Affairs. I did the same for private-sector folks when I moved to Irvine, Calif., to run a leadership program involving Israeli startup CEOs for the Merage Foundations. Despite the different profiles of participants, one of the compelling themes that seemed pervasive to both — for- profits in Israel and governments everywhere — was and remains building the capacity of leaders to give brief, focused oral presentations or elevator pitches (or, as one presenter once said, “how to seduce someone between the first and fifth floor”). A seduction lesson in oil economics in a thousand words or three minutes’ reading time!

Now that I got your attention! Sex always does it! During the last few days, I read some straightforward, short, informative articles on oil company and environmentalist group perceptions concerning the relationship between the price of oil per barrel and the cost of drilling. Their respective pieces could be converted into simple written or oral elevator pitches that provided strategic background information to the public and political leaders — information often not found in the news media — press, television, cable and social media — concerning oil company or environmentalist decision-making.

This is good news. Most of the academic and, until recently, media coverage of the decline of oil and gasoline prices generally focuses on the dollar or percentage drop in the price of oil and gasoline from a precise date … 3 months, 6 months, a year, many years ago, etc. And, at least by implication in many of its stories, writers assume decision-making is premised on uniform costs of drilling.

But recently, several brief articles in The Wall Street Journal, MarketWatch, OilPrice.com, etc., made it clear that the cost of drilling is not uniform. For example, there is a large variation internal to some countries depending on location and geography and an often larger variation between and among oil-producing nations. Oil hovers around $80 a barrel now, but the cost of drilling varies considerably. In Saudi Arabia, it is $30 per barrel or less on average; in the Arctic, $78; in Canada’s oil sands $74; and in the U.S, $62.

If you’re responsible for an oil company or oil nation budget, a positive cash flow and a profit, you are likely to be concerned by increasingly unfavorable opportunity cost concerning costs of drilling and returns per barrel. In light of current and possibly even lower prices, both companies and nations might begin to think about the following options: cutting back on production and waiting out the decline, pushing to expand oil exports by lowering costs in the hopes of getting a better than domestic price and/or higher market share, lessening your investment in oil and moving toward a more balanced portfolio by producing alternative fuels. If you believe the present price decline is temporary, and that technology will improve drilling cost/price per barrel ratios, you might consider continuing to explore developing wells.

Up to now, the Saudis have acted somewhat counterintuitively. They have created dual prices. Overall, they have sustained relatively high levels of production. For America, they have lowered prices to hold onto or build market share and undercut prices related to U.S. oil shale. For Asia, they have increased prices, hoping that demand, primarily from China and India, and solid production levels in the Kingdom, will not result in a visible drop in market share.

However, the Saudis know that oil revenue has to meet budget needs, including social welfare requirements resulting in part from the Arab Spring. How long they can hold onto lower prices is, in part, an internal political and budget issue, since oil provides a disproportionate share of the country’s public revenue. But, unlike the U.S. and many other nations, where drilling for tight oil is expensive, the Saudis have favorable ratio between production costs and the price of oil. Again, remember the cost of production in the U.S., on average, is about 100 percent above what it is in Saudi Arabia and some other OPEC nations. Deserts may not provide a “wow” place for all Middle East residents or some tourists looking for a place to relax and admire diverse landscapes, but, at the present time, they provide a source of relatively cheap oil. Further, they permit OPEC and the Saudis to play a more important global role in setting prices of oil and its derivative gasoline than their population numbers and their nonoil resources would predict. Lowering prices and keeping production relatively high in the Middle East is probably good for the world’s consumers. But as environmentalists have noted , both could slow oil shale development in the U.S. and with it the slowdown of fracking. Both could also interest oil companies in development of alternative fuels.

Oil-rich nations in the Middle East and OPEC, which control production, will soon think about whether to lower production to sustain revenues. In the next few months, I suspect they will decide to risk losing market share and increase per barrel oil prices. U.S policy and programs should be recalibrated to end the nation’s and West’s often metabolic response to what the Saudis do or what OPEC does. Support for alternative replacement fuels is warranted and will reduce consumer costs over the long haul and help the environment. It will also decrease America’s dependence on Middle East oil and reduce the need to “think” war as a necessary option when developing America’s foreign policy concerning the Middle East.