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Arctic Leaf

Carnivals, peas and oil predictions

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Earlier in my life, I volunteered as a carnival “barker” — you know, the guy who tries to inveigle passers-by to throw a ring around a bottle to win something for their date or children. At the time, most paid a buck, lost, and were happy as I was, because the funds went to charity. While I was at my station, I happened to see a would-be magician working the old pea trick. You know, you followed the pea in the magician’s open hand and when the magician closed his hands, you picked the hand that you believe covers the pea. Again, passers-by lost all the time, because his sleight of hand was faster than their eyes (or their brains and their eyes). Charity, once again, came out ahead.

What’s all this got to do with oil? Well yesterday, I was bemused by a piece in the Financial Times by Ed Crooks, titled “U.S. oil boom resets on shaky foundations.” Earlier this week another article in another respected paper quoted an expert that stated that America is now and will be in the future much less dependent on Middle Eastern oil because of the oil boom and its likely continuance into the future. Numerous papers have called the now and future oil boom the Saudization of America.

Which pea will be picked up tomorrow by the media — the oil is a shaky pea, or the oil is our country’s genetic future pea. Can we, as consumers, based on often different expert projections related to the supply and demand for oil, pick the right pea ahead of the media’s grand pronouncements concerning oil production and consumption? The answer, given the probability of frequent expert-related projection amendments, the different methodologies involved and, yes, in some cases the captive quality of the projector, is no. If it’s Monday, oil is our salvation and America’s oil largess will be a road to riches; if it’s Tuesday, oil salvation is uncertain and we will remain dependent on importing oil; if it’s Wednesday, you put two oil experts in a room and you get three or four or more future projections; and if it’s Thursday, oil analysts, including some of the best, throw up their hands and say we really don’t know where oil is going. How can we be sure, given all the complex variables? Why did I go to college to study research and statistics? I want my tuition money back.

Oil projections recently seem more an art than science. Paraphrasing Ralph Waldo Emerson, and in defense (just kidding) of what often seems like “one a day” projections, foolish consistency is the hobgoblin of foolish minds , and the King from The King and I, oil projections are a “puzzlement.”

More attention should probably be paid to the Financial Times article. The author indicates that a question hangs over the U.S. oil boom in relation to increasing production costs. “The effort required to squeeze the oil out of the rock, from which it will not flow easily, means that shale production has a relatively high cost, compared with the traditionally cheap to extract reserves of the Middle East.”

Up to this point, Crooks (while he is named Crooks, he is not really a crook, but a fine writer) has been easy to follow. Relatively high oil per barrel costs, he indicates, lead to investment in drilling and, as important, innovative fracking technology, products and services. Small and mid-sized independent firms seemed to flourish, given their cost efficient innovative production processes. Service companies supporting drillers and production firms positioned themselves well, given the oil boom. It all seemed like fun and games. Everyone made money and met investor or stockholder expectations. Dinners at fancy restaurants seemed the norm.

But Crooks maintains that with the fall in prices for natural gas in 2012, the oil related equipment and service industry quickly met its waterloo. “Capacity utilization for pressure pumping equipment dropped to just 74%. Prices for pumping services dropped an estimated 22% between the first quarter of 2012 and the third quarter of 2013.” It was tough time for service firms. Many tried to switch from gas to oil drilling, but over capacity and underutilization were pervasive.

Recently, things appear to be looking up for the service and equipment sector. Oil prices seem relatively stable, at least until tomorrow, and gas prices seem on the uptake. Interestingly, several respected industry spokespersons suggest that a rise in prices for equipment and activities is likely more dependent on the hope for significant LNG exports and assumed higher natural gas prices (and production) than on significant increases in shale drilling for oil. But as Crooks points out, gas producers and servicers’ gain is oil’s pain. An increase in prices for services and a reduction in equipment overcapacity, the article suggests will raise the costs of oil production and lead to more investor as well as producer caution concerning investment in new risky oil wells. Remember most experts indicate that the best sites for new oil drilling have been leased or acquired. “It is possible that U.S. shale oil can continue to thrive only if shale gas continues to struggle.”

Several of the assumptions in Crooks’ piece seem to reflect the same shaky foundations that he indicates weaken projections concerning the U.S. oil boom. For example,

  • Yes, hard-to-get-at oil from shale will cause producers pause when thinking about future development. It will be much more expensive than drilling from conventional, easy-to-get-at U.S. or Middle East reserves. Since oil is globally traded, we could see an increase in dependency on imports.
  • Yes, the service and equipment industry will be in better shape if the natural gas industry grows and thrives. The costs of its equipment and services will rise accordingly. However, the increases in the price of natural gas, if they occur, and, if they are sustainable over time, will probably be relatively small in terms of dollars and may not significantly affect oil production and decisions. Sure, there are similarities between oil and natural gas drilling equipment and services, and while they constitute a large share of the on-site drilling costs (40-70%), rapid technological improvements matched by improved management of drilling have and continue to occur, lessening cost impact by improving productivity. They may reduce the harm seen by Crooks that could come to the oil industry from increased service costs. Other related factors, such as global oil consumption, supply and per barrel costs, international tensions, environmental sensitivities, financial speculation and profit seeking etc., will probably affect oil industry opportunity costing concerning drilling — even more than the increased cost of equipment and services. Taken together, these factors often explain short term changing oil-per-barrel prices. A large anticipated and continuous increase or decrease in per barrel costs will provide a drilling marker for investors and producers — over $100 more wells, under $70 or so less wells and uncertainty in between.
  • Yes, exporting LNG will improve the economic condition of the natural gas industry; just as removing export restrictions on crude oil will improve the economic viability of the already thriving oil sector. But the impact of extended large LNG sales abroad will likely take years, given the need to gain regulatory acquiescence to develop infrastructure and product. Similarly, the likelihood of eliminating restrictions on crude oil exports remains politically iffy.

Concern with the health of the natural gas industry— whether from Crooks’ perspective, because he believes growing gas prices will help strengthen the oil boom’s foundation, or my own, because the increased use of natural gas and its derivatives, ethanol and methanol as transitional transportation fuels will help reduce GHG emissions and improve the quality of the environment as well as reduce the price of gasoline at the pump and enhance America’s security, is legitimate. I wonder why Crooks neglected to discuss natural gas as a transportation fuel and the need for competition in America’s gasoline market in his otherwise provocative article. But it seems his core objective in the piece was the health and well-being of the oil industry. A bit more balance would have served him and the readers well.

Arctic Leaf

Make love, not war — a national dialogue on alternative fuels

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Remember the passion, the commitment and vigorous national dialogue concerning the Vietnam War, the civil rights movement and the women’s movement? No matter how one viewed the issues involved or whether one was pro or con with respect to each initiative, most of the nation, even if only watching the 6 p.m. and 10 p.m. news, seemed involved, to some extent, emotionally and many intellectually.

Given the concern many Americans seem to have for the future of the environment, the nation’s security problems and the sluggish economy (not to mention shrinking pocketbooks), why haven’t we been able to replicate the intense passions and commitments of the ‘60s and early ‘70s with respect to the muted debate over alternative transitional fuels. Very few articles in the press or on cable and TV headline the wisdom of efforts to reduce America’s dependence on gasoline through providing increased consumer choices at the pump. Those that do approach headline or first-tier status suggest, generally, often without hard analysis, that increased oil and gas production (Saudization of America) will grant the U.S. oil independence, forgetting the global nature of the oil market. The media has not focused on the costs of continued reliance on imported oil and the very restricted American vehicular fuel market limiting consumers, by and large, to costly, dirty gasoline. In-depth coverage of alternative non-renewable fuels as substitutes for gasoline and as transitional fuels before renewables are ready for prime time is rare and most times, more opinion than fact. Even the venerable New York Times rarely covers alternative transitional fuels in the context of an overall assumed national commitment to “wean” the nation off of gasoline.

Why haven’t the public and the media become involved in a real dialogue concerning the benefits and costs of alternative fuels versus continued reliance on gasoline?

I think it’s a bit of a chicken-and-egg question. Recall the intense TV coverage of Bull Connor’s vicious attack using dogs and high pressure hoses on kids in Alabama and the nobility of Martin Luther King Jr.’s 1963 speech on the mall? Both gripped us and made civil rights a moral issue. Remember TV’s extensive coverage of the marches by mostly young but also many older folks opposing the Vietnam War? And who could forget the photo of the little girl walking alone on the highway with her clothes burned off from a napalm attack and the many movies portraying G.I. casualties? It was difficult to stay neutral concerning the war, particularly if our kids or the neighbor’s kids were involved. Finally, while some Americans disagreed with them, the women’s movement had visible charismatic leaders like Gloria Steinem, Bella Abzug and Betty Ford, who had a knack for getting on TV and in newspapers to champion the need for women’s equality. Over time, they reached many of us, and if we didn’t join the movement, we argued for its success.

President Obama’s State of the Union speech was greeted with popular applause when he said we must get off of oil, but the line concerning the need to wean us off oil seem to have a shelf life of 24 hours…or maybe 48 hours. It clearly didn’t move the needle much in public interest and the public’s attention understandably turned to more media-friendly issues, such as Washington’s dysfunctional character, the budget, the debt ceiling and the Middle East.

Anti-Vietnam sentiments, civil rights and women’s rights were internalized by a relatively large, but still a minority, sector of the public. Participants in the effort to secure change viewed the three issues as affecting them personally and, for the most part, crossed class and caste lines, a fact that was deepened by the draft with respect to Vietnam. Although none of the three probably could have secured a majority vote,if placed on the ballot initially, they each grabbed the attention of most Americans over time.

Looking back, clearly the sustained involvement of a relatively cohesive minority of the public led by aggressive leadership created significant political and policy reforms. Issues were cast in terms Americans could easily understand — securing justice, freedom and a better America. They created a strong moral underpinning to proposed actions. Ultimately, grassroots support convinced key elected leaders that they could move positively without retribution to secure respective agendas.

Enveloping alternative fuels and the monopolistic gasoline markets in moral tableaux will not be easy. The issues involved are complex and don’t, without effort, engage people for more than short periods of time. They are tough to convert to brief TV or cable spots. Try going to a dinner party and raising moral variables around the reality of limited choices of consumers at the pump. Yawn…don’t expect a return invitation! Similarly, the fact that low-income households pay nearly 15% of their income for gasoline and are therefore limited concerning purchase of other basic goods does not easily translate into visual and visceral understandable, personal moral pictures. Similarly, despite the data showing increasing harm to the poor regarding the journey to work and constrained housing choices caused by high costs of gasoline, aggregate statistics blur individual problems. The economy’s overall sluggishness and its impact on most Americans, except the very affluent, divert focused attention. Happily, there is no Bull Connor, and your neighborhood gasoline station owner is often from the community. It’s difficult to make him or her an ogre. He or she is generally a hard-working individual and is struggling to make ends meet. Even the most vigorous advocates of alternative fuels and open fuel markets have yet to figure out how to vividly personalize the negative impact of the constraints imposed on the market by the oil industry on consumers, particularly low income consumers. Black hats and mustaches (whether painted in graphics or narratives) to describe the oil industry’s leadership, hasn’t worked well. Where is Norman Rockwell when we need him?

The phrase “we need all of the above” is used often in a bipartisan way by our political leaders to describe the nation’s energy strategy. The phrase may well be true, but it is difficult to get excited about it. Try it on your husband, wife or significant other tonight and see if it motivates a meaningful response. “Hey, honey, there is a meeting tonight of people interested in energy reform. The expansion of alternative fuel choices will be at the center of a strategy to grant priority to all our energy sources — coal, oil, natural gas, bio fuels, derivatives of each. It’s important. Do you want to go?” Probable response: “Are you serious? You were so romantic when I met you. What happened?”

The messages related to Vietnam, the civil rights movement and the women’s movement, at the time, were simplified into understandable, often emotional, terms. They were complemented by extensive media coverage and by strong moral certitude of both presenters and listeners. Parsed words and nuanced sentences were not often needed to convince folks to join the causes. The coalitions that were created put in hard work and lots of sweat equity to build and generate grassroots efforts. But the people were out there waiting to be recruited. While members might have disagreed on strategic policy options, they were generally together on broad objectives.

The effort to secure alternative transitional fuels and open up the gasoline market does not lend itself easily to the type of grassroots initiatives generated in the ‘60s and early ‘70s. The messages and data used to support them are seen as too complicated and, frankly, confusing to potential grassroots participants. In this context, the oil industry and its captive groups like the American Petroleum Institute (API) have big budgets and have seen fit to use their resources seemingly to confuse and distort information concerning gasoline and alternative fuels.

I am not sure a passionate grassroots movement can be created to support alternative fuels. At best, it will be difficult. But, democracy works in many ways. Progress is being made in forging working alliances among advocates of alternative fuels and leaders in the business, environmental, public sector and academic communities. Their ability to form sustainable, strong alliances will increase their likely ability to influence public policy concerning transitional fuels and open fuel markets. Building public understanding, combined with political acuity and a willingness to reach out to varied groups, will increase the odds of success in winning political, legislative and statutory support. Much will depend on their collective willingness to depart from traditional divisive ideological and institutional focus. Their leadership, borrowing the rhetoric from the Vietnam War, will probably have to learn how to make love, not war, in developing a collaborative agenda.