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Arctic Leaf

Oil and Natural Gas Prices and the Future of Alternative Fuels

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I love Vivaldi’s Four Seasons, especially the music from the spring. I love the optimistic line from the poem by P.B. Shelley, “if winter comes can spring be far behind.”  The unique cold weather, the Midwest, East Coast and even the South, has been facing this year will soon be over and spring will soon be here. Maybe it will be shorter. Perhaps, as many experts indicate, we will experience a longer summer, because of climate change. But flowers will bloom again; lovers will hold hands without gloves outside, kids will play in the park… and natural gas prices will likely come down to more normal levels than currently reflected.

Last Friday’s natural gas price according to the NY Times was $5.20 per thousand cubic feet. It was “the first time gas had crossed the symbolic $5 threshold in three and half years, although (and this is important) the current price is still roughly a third of the gas price before the 2008 financial crisis and the surge in domestic production since then.”

Why? Most experts lay the blame primarily on the weather and secondarily on low reserves, a slowdown in drilling, and pipeline inadequacies. The major impact so far has been on heating and electricity costs for many American households, particularly low and moderate income households and the shift of some power plants from natural gas back to coal.

I wouldn’t bet more than two McDonald’s sandwiches on where natural gas prices will be in the long term. But I would bet the sandwiches and perhaps a good conversation with a respected, hopefully clairvoyant, natural gas economist-one who has a track record of being reasonably accurate concerning gas prices- that come cherry blossom time in Washington, the price of natural gas will begin to fall relatively slowly and that by early summer, it will hover between 3.75 to 4.25 per thousand cubic feet.

Natural gas prices over the next decade, aided by growing consensus concerning reasonable fracking regulations as reflected in Colorado’s recent regulatory proposals, and EPA’s soon to be announced regulations, should be sufficiently high to reignite modest drilling passions, improvements in infrastructure and increased supplies at costs sufficient to maintain an advantage for natural gas based fuels when compared to oil based fuels at the pump.

The present relatively low price of oil (Bent Crude $107 a barrel; WTI $97.00 a barrel) and its derivative gasoline ($3.30 a gallon) may impact the cost differential between gasoline and natural gas based fuels. But the impact could go both ways. That is, if the price of oil per barrel continues to fall and translate into lower costs for gasoline, the price differences between natural gas based fuels and gasoline would narrow. Conversely, if the price of oil goes lower than $90 a barrel, its present price, it likely will impede future drilling, particularly in high cost, hard to get at environmentally sensitive areas. This fact combine with renewed economic growth in the U.S., Europe and Asia, as well as continued tension in the Middle East and continued speculation could well result in a return to higher gasoline prices.

Clearly, the relationship between the cost of natural gas based fuels (CNG, ethanol and methanol) and gasoline is a critical variable in determining consumer behavior with respect to conversion of existing cars to flex fuel cars and the purchase of new natural gas cars (Based on the national pilot involving 22 states lead by Governor Hickenlooper(D) and Governor Fallin(R), as well as interviews with carmakers, creation of a deep predictable market for CNG fueled vehicles will bring down the price of such cars and give them competitive status with gasoline fueled vehicles).

The odds are that the lower costs of natural gas based fuels will serve as an incentive to buyers and existing owners to use them. That is, assuming problems related to fuel distribution as well as access and misinformation concerning the affect alternative fuels have on engines are resolved by public, non-profit, academic and private sectors. Maybe I will up my bet!

Arctic Leaf

Can Ethylene Replace Gasoline?

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The effort to replace oil-based gasoline in our cars with similar fuels derived from natural gas took a big step forward last week with the announcement that Siluria, a promising start-up, will build a $15-million demonstration plant in Texas

The plant will produce ethylene, the most commonly produced industrial chemical in the world and the feedstock for a whole raft of products in the chemicals and plastics industry. But Siluria, which is not yet a public company, is also planning demonstration plants that will produce gasoline. Initial estimates are that the product could sell at half the price of gasoline derived from oil. If these projections prove to be anywhere close to reality, we could be on a path to a fuel economy that is finally able to cut its dependence on oil.

The idea of producing ethylene from natural gas has been around since the 1980s but achieved little success. Several major oil companies invested millions of dollars in the process but finally gave up on it. Jay Labinger, a Caltech chemist who did much of the initial research, finally wrote a paper in the 1980s warning other researchers that it was a waste of time. He may have given up too soon.

Siluria is a California-based startup that has received much of its funding from Silicon Valley investors who tried to move from computers and the Internet into the energy space over the last decade. So far their success hasn’t been great. In fact Vinod Khosla and other Silicon Valley energy entrepreneurs were the subject of an embarrassing critique on “60 Minutes” only two weeks ago. The Siluria venture, however, may be the gusher that makes up for all the other dry holes.

The 1980s efforts concentrated on heat-activated processes whereby methane is split into carbon and hydrogen and then recombined into the more complex ethylene, which has two double-bonded carbons and four hydrogens. All these efforts proved far too energy-intensive, however, and never became economical.

Siluria has been trying a different approach, seeking catalysts that would facilitate the process at much lower energy levels. Moreover, the company has spurned the more recent approach of trying to design molecules that fit the chemicals just right and gone back to the old shotgun approach where thousands of candidates are tried on a catch-as-catch-can basis.

Defying all expectations, the process seems to have worked. Siluria has come up with a catalyst that it says promotes the breakdown and subsequent reassembly of methane at very low energy levels. It has built pilot plants in San Francisco, Menlo Park and Hayward, California and last week announced plans for building a full-scale demonstration plant in La Porte, Texas in conjunction with Braskem, the largest petrochemical manufacturer in South America. If that isn’t proof that Siluria is on to something, what is

The implications of this development are enormous. Natural gas is two to six times more abundant than oil in the world and is now selling at 1/5th the price for an equivalent amount of energy. The traditional tandem pricing of oil and natural gas prices has now been broken and gas is functioning as a completely different commodity, much cheaper.

The difficulty all along has been that natural gas is hard to put into your gas tank. So far efforts have involved compressing natural gas, which means storing it at 3600 pounds per square inch, or liquefying it, which requires temperatures to be lowered to – 260 degrees F. Neither is very practical and would require a whole new auto engine and delivery infrastructure.

Efforts to convert gas into a liquid have concentrated around methanol, which is the simplest alcohol and has been used to power the Indianapolis 500 racing cars since the 1960s. But methanol is the deadly “wood alcohol” of the Prohibition Era and raises fears about poisoning – although gasoline is poisonous, too. The Environmental Protection Agency has never certified methanol for use in auto engines, although an M85 standard has been permitted in California.

Synthesizing gasoline through Siluria’s ethylene-based pathway could solve all these problems. Ed Dineen, CEO of Siluria, says that the gasoline product could sell at half the price of today’s gasoline. With more natural gas being found all the time – and with $1 billion being flared off uselessly around the world each year – any success in turning natural gas into a readily accessible automobile fuel could have a revolutionary impact on our entire economy.

Arctic Leaf

The Principal Impediment to Alternative Fuels Is – Government Regulation?

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In their path-breaking study, “Fuel Choice for American Prosperity,” the Energy Security Council carefully outlines the dilemma that our complete dependence on oil for transportation has created.

“It’s not the oil we import, it’s the price,” was the way they summarized it. As I outlined in a previous post the authors show how OPEC still controls the bulk of the world’s oil reserves and has not increased its output since the 1970s. As a result, even though we have increased domestic production dramatically and cut down on consumption, we are actually paying more for our oil imports than we were ten years ago. Why?  Because, OPEC is still able to manipulate the price to keep it at $100 a barrel. It’s not the black stuff we import that crimps our economy, it’s the price of oil we must accept from a monopolistic cartel.

So what to do?  Do we set up protests outside OPEC’s corporate offices in Vienna?  Do we bring an anti-trust suit in some world forum? People have actually tried such things and gotten nowhere. No, the only way to extricate ourselves from this market is to break the monopoly that oil has on our transportation system. If oil had competitors, it will start acting like any other commodity and respond to supply and demand. The key to breaking the OPEC monopoly, says USESC, is to develop alternative fuels.

When it comes to asking why we have not made more progress in developing alternative fuels, however, USESC has a surprising answer: government regulation. Government regulation? How can that be? I thought the government was doing everything it could to foster alternatives and try to lower our oil imports. Well, as usually happens when the government gets involved in manipulating a market, things quickly get complicated and murky. Here’s what has happened:

CAFE standards. When Congress first started setting corporate fleet average standards, responsibility was given to the Environmental Protection Agency. In retrospect, this was an odd choice, since EPA is more concerned with air pollution than reducing oil consumption. The Department of Energy would have been a more logical choice. This didn’t become visible in the 1980s when pollution concerns centered on the combustion products of sulfur and nitrogen. But now that carbon dioxide and global warming have become the principal concerns, the EPA has subtly changed its emphasis. As USESC points out; “CAFE’s initial energy security centric vision has been blurred by the desire to use the law to promote greenhouse gas emission reduction goals.”

In its latest regulatory effort, for example, the EPA will reward auto companies for introducing alternative fuels by applying a “multiplier” to their corporate fleet average beginning in 2017. Every electric and hydrogen fuel cell vehicles will count as two vehicles in the denominator of the corporate average, phasing down to 1.5 by 2021. For plug-in hybrid electric vehicles (PHEVs) and compressed natural gas vehicles (CNG), the multiplier will be 1.6, phasing down to 1.3.

All this seems fair enough. EVs and FCVs use no gasoline and plug-in hybrids are only partially dependent on oil. The real problem, however, is that flexible-fuel vehicles – cars that are designed to burn ethanol, methanol or gasoline – have only been given credit based on how much E-85 they burn in real-world driving. The auto manufacturers have used this to avoid making improvements in car efficiency. This is regrettable because flexible fuel engines burning either ethanol from homegrown corn or methanol derived from natural gas would be the best say to cut down on imported oil. Both methanol and ethanol are liquids and fit right into our current gas station delivery system. Compressed natural gas and electricity, on the other hand, require a whole new replenishing system. Yet the EPA remains wary of both ethanol and methanol because they produce carbon exhausts. CNG also produces carbon exhausts, of course, and EVs drawing power from coal or natural gas will produce exhausts at the power plant. The EPA has tried to compensate for this by adding upstream carbon releases for EVs and other alternative fuels but it does not do the same for gasoline!  In short, the whole multiplier system is a mess. The EPA would do much better just trying to reduce oil dependence rather than bringing carbon emissions into the equation.

Costs of converting to alternative fuels: One of the most important steps in developing alternative fuels is converting existing gasoline vehicles to run on other fuels.

In general, there are three types of conversions – switching a gasoline or diesel car to run solely on another fuel (dedicated), changing a vehicles to run on higher alcohol blends (flex fuel), or installing an additional fuel tank so that the vehicles can burn the competing fuel as well (bi-fuel). In American, however, onerous regulations and staggering costs of conversion has deterred consumers.

The study points out that installing a CNG tank in an American car costs $10,000 while the same tank in Europe can be installed for $3,800. The difference is the strength of the tank as dictated by the EPA. Of course we don’t want to be in a situation such as Pakistan where CNG cars are exploding due to poor tank quality.  But even in comparison to other developed countries, U.S. regulatory requirements are excessive. 

Taxing by volume instead of by energy content: The federal and state governments places taxes on gasoline and any other product used to propel trucks and automobiles. The logic here is that the money goes into special highway trusts that maintain the roads. But the tax is imposed by the gallon rather than by energy content. USESC maintains that this is discriminatory because methanol, ethanol and other non-gasoline products have less energy density and therefore require more volume for the same amount of energy. This is a fine point and might be disputed by the oil industry, which would say if ethanol and methanol have less energy content, that is simply their tough luck. Ethanol, on the other hand, has been exempted from the federal highway tax and most state gas taxes, which is what makes it economical to add to gasoline.

The ban on methanol: Finally, although the USESC report does not even mention it, the biggest regulatory impediment to alternative fuels is the EPA’s failure to authorize the use of methanol in gas tanks. Putting anything in your gas tank requires permission from the EPA because of air pollution considerations. Although methanol actually produces less nitrous oxides and less particulate matter than gasoline, the EPA has never given it an OK. Although methanol made from natural gas might be the best alternative for replacing gasoline, it is does not yet have EPA approval.

Changing any and all of these regulations would require a huge concerted effort by some constituency that had a strong material interest in pushing it through Congress. Unfortunately, there is no such group. The natural gas industry is not yet organized around the issue and is more concerned about defending fracking and opening up natural gas exports. T. Boone Pickens is pushing CNG for trucks through his Clean Energy Fuels but there is no similar effort to promote the use of natural gas in cars. The entire farm bloc is behind corn ethanol, of course, which is why it has been so successful. But there is no similar interest promoting methanol, which may be just as good an alternative or better.

Under these circumstances, the best alternative is to persuade the auto manufacturers to produce flex-fuel vehicles that can run on any fuel – natural gas, hydrogen, biodiesel, E85 (85% ethanol) or M85 (85% methanol). The adjustment would not add significantly to the price of a new car and would open up the field to all the competitors attempting to replace gasoline.

Let the best fuel win.

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

Flaring gas in North Dakota – what a waste!

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You can see them from outer space. The flames from natural gas flares in the Williston Basin of North Dakota now throw off a nighttime glow larger than Minneapolis and almost as big as Chicago. All that energy is going up in smoke.

Ceres, a Boston nonprofit organization, issued a report last week illustrating that the huge surge in oil production in the Bakken Shale has outrun the drilling industry’s ability to cope with the natural gas byproduct. “Almost 30% of North Dakota gas is currently being burned off,” the report said.

The report also states, “Absolute volumes of flared gas have more than doubled between May 2011 and May 2013. In 2012 alone, flaring resulted in the loss of approximately $1 billion in fuel and the greenhouse gas emissions equivalent of adding one millions cars to the road.”

The loss rate has actually been reduced from 36% in 2011, but production has tripled in that time, meaning that an additional 266 billion cubic feet (BCF) a day is going up in smoke.

Moreover, according to the report, North Dakota gas contains other valuable products. “The natural gas from the Bakken formation contains high volumes of valuable natural gas liquids (NGLs), such as propane and natural gasoline, in addition to dry gas consisting mostly of methane. It is potential worth roughly four times that of the dry gas produced elsewhere in the United States.”

“There’s a lot of shareholder value going up in flames,” Ryan Salomon, author of the report, told Reuters.

So why can’t more be done to recover it? Well, unfortunately, according to the North Dakota Industrial Commission, the spread between the value of gas and oil, which has stayed pretty close historically, has now increased to 30 times in favor of oil in the Bakken. Even nudging up gas prices to $4 per thousand cubic feet (MCF) in recent months hasn’t made much difference. Consequently, it isn’t worthwhile trying to collect gas across widely dispersed oil fields.

Encouraging this waste is a North Dakota statute that exempts flared gas from paying any severance taxes and royalties during the first year of production. Since most fracking wells have a short lifespan, gushing forth up to 60% of their output in the first year, this makes it much easier to write off the losses.

Nonetheless, all this adds up to a colossal waste. As of the end of 2011, the amount of gas being flared each year in North Dakota was the equivalent of 25% of annual consumption in the United States and 30% Europe’s. The high burn off has moved the country up to fifth place in the world for flaring, only behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. Although the World Bank says worldwide flaring has dropped by 20% since 2005, North Dakota is now pushing in the opposite direction. Altogether, 5% of the world’s gas is wasted in this way.

Efforts are being made to improve the situation: with big hitters are doing their part. Whiting Petroleum Corporation says its goal is zero emissions. Hess Corporation, which has a network of pipelines, is spending $325 million to double the capacity at its Tioga processing plant, due to open next year. Continental, the largest operator in the Bakken, says it has reduced flaring to 11% and plans to reduce it further. “Everybody makes money when the product is sold, not flared,” Jeff Hunt, vice chairman for strategic growth at Continental, told Reuters.

But it’s all those little independent companies and wildcatters that are the problem. Storage is impossible and investing in pipeline construction just too expensive. Entrepreneurs are doing their part. Mark Wald, a North Dakota native who had left for the West Coast, has returned to start Blaise Energy Inc., a company that is putting up small gas generators next to oil wells and putting the electricity on the grid. “You see the big flare up there and you say, `Something’s got to be done here,’” he told the Prairie Business.

But the long-term solution is finding new uses for natural gas and firming up the price so that its collection is worthwhile. What about our transport sector? We still import $290 billion worth of oil a year at a time when as much as half of that could be replaced with domestic gas resources. Liquid natural gas, compressed natural gas, conversion to methanol, conversion to ethanol – there are many different ways this could be promoted right now. Ford has just introduced an F-150 truck with a CNG tank and an engine that can run on either gas or gasoline. With natural gas selling at the equivalent of $2.11 a gallon (and even cheaper in some parts of the country), the new model can pay off the additional $9,000 price tag in two to three years. There are now an estimated 12,000 natural gas vehicles on the road and the number is growing rapidly. “This is an emerging technology in a mature industry,” Ford sustainability manager Jon Coleman told USA Today.

But an even better way to harvest this energy might be to design small, transportable methanol converters that could be attached to individual gas wells. Methane can be converted to methanol, the simplest alcohol, by oxidizing it with water at very high temperatures. There are 18 large methanol plants in the United States producing 2.6 billion gallons a year, most of it consumed by industry. But methanol could also substitute for gasoline in cars at lower cost with only a few adjustments to existing engines. The Indianapolis 500 racers have run on methanol for more than 40 years.

The opportunities in the Bakken are tremendous – and the need to end the waste urgent. The U.S. Energy Information Administration estimates that production in the Bakken is due to rise 40%, from 640,000 to 900,000 barrels per day by 2020. North Dakota has already passed Alaska as the second-biggest oil producing state and now stands behind only Texas, where pipeline infrastructure is already built out and less than 1% of gas is flared.

The increased production, matched with the expanding technology for using gas in cars, presents an enormous opportunity.

Arctic Leaf

And that’s the way it is or isn’t — stable oil and gas markets

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“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.

What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.

The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”

What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”

In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)

So why be wary and worry?

1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.

2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel

The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.

It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.

3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”

4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.

I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.