Fight in the Global Energy Market

For John, BLUF:  The Global Market for oil may kill the Keystone XL Pipeline.  Nothing to see here; just move along.

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In the British Newspaper The Telegraph there was an article by Reporter Ambrose Evans-Pritchard, "Oil industry risks trillions of 'stranded assets' on US-China climate deal".  The sub-headline is "Petrobas' hopes of becoming the world's first trillion dollar company have deflated brutally".

From deep in the article is this:

JP Morgan expects US crude to slide to $65 over the next two months, a level that could lead to a "cumulative default rate" of 40pc for the low-grade energy bonds that have financed much of the fracking boom, if it drags on for two years.

Gordon Kwan from Nomura says OPEC (or at least the Saudi-led part) is "engaged in a price war with US shale producers" and will not rest until it has inflicted serious damage.  He thinks Saudi Arabia will deflate US crude prices to $70 and hold them there for three to six months, targeting high-cost shale plays in the Bakken and Eagle Ford fields.

OPEC has a clear motive to do this.  The US has slashed its net oil imports by 8.7m barrels a day (b/d) since 2005, equal to the combined exports of Saudi Arabia and Nigeria.  Yet this game of chicken could be dangerous.  There will be collateral damage along the way.

The economies of several nations will be impacted by this move (a move some say can not be sustained).  Included is Brazil, where Petrobras is the most indebted company in the world and their stock price has dropped 87pc from the peak.  Then there is Venezuela, Russia and Iran, each of which has a national economy and government financing based on a higher price for crude oil.

Further on the article notes this:

China is already shutting down its coal-fired plants in Beijing.  It has imposed a ban on new coal plants in key regions after a wave of anti-smog protests.  Deutsche Bank and Sanford Bernstein both expect China's coal use to peak as soon as 2016, a market earthquake given that the country currently consumes half the world's coal supply.

This will impact US exports, in that vast quantities of coal are mined in the Powder River Basin and shipped by rail to West Coast ports, including as far away as Terminal Island, in Long Beach, California, for shipment to China.

But, the article continues.

The US in turn has agreed to cut emissions by 26-28pc below 2005 levels by 2025, doubling the rate of CO2 emission cuts to around 2.6pc each year in the 2020s.

Whether or not you agree with the hypothesis of man-made global warming, the political reality is that the US, China, and Europe are all coming into broad alignment.  Coal faces slow extinction by clean air controls, while oil faces a future of carbon pricing that must curb demand growth far below what was once expected and below what is still priced into the business models of the oil industry.

As President Obama promised back when first running for President, he is going to shut down the coal industry.  It looks like he is well on the way.  What will replace it?  Will the replacement be more "environmentally friendly?

The article ends with this discussion of how an innovative society is a disruptive society and how technology change means that past investments may well lose their value as new technologies emerge.

Great fortunes were made in 18th Century in the British canal boom. The network of waterways halved coal prices and drove the first leg of the Industrial Revolution. Yet you had to know when the game was up.

The canal industry was on borrowed time even before the Liverpool and Manchester Railway first opened in 1830, unleashing the railway mania that entirely changed the character of Britain.

These historic turning points are hard to call when you are living through them but much of today's the fossil fuel industry has a distinct whiff of the 19th Century canals, a pre-modern relic in a world that his moving on very fast.

So, if Climate Change is (1) real and (2) bad, what are we going to do to reverse it?  Perhaps a better question is how are we going to change how we live and work in order to reverse climate change.  There is no free lunch.  Changing the CO2 levels in the atmosphere will require major changes in how we live and work.  It might mean changes such as no more going to Florida to visit Disney World.  No more commuting to Boston by auto, and maybe no commuting to the train station by auto.  No more air conditioning.

I recall from my time in the Fairbanks area that some person was heating his cabin with one light bulb and a bunch of chickens.  Should we all be keeping chickens, again?  Less drastic, should we be replacing all the homes in Lowell to provide for more energy efficient, and more compact, living spaces?

And, there is the question of if the Climate Change folks can actually “live up to its own book of rules”?

Regards  —  Cliff