Roger Kubarych: Talking Points on Energy

Here is the latest from Roger Kubarych c/o Craig Drill Capital -- Chris

Four key issues drive policy making in several major countries: national security, energy security, economic growth and prosperity, and global climate protection.  Despite the importance of each, they are often in conflict.

Impressive development over the past four or five years of shale gas and tight oil resources, mainly in the US or by US firms, has yielded broad benefits to global energy security, as well as to the US economy.  But it is not clear that overall US national security has been enhanced or that environmental resources have been adequately protected.

Energy security is not synonymous with energy independence.  The US, for example, is not and cannot be energy independent given the current fleet of over 250 million vehicles that burn gasoline or diesel.  A shift toward electric cars is unlikely to eliminate this oil dependence for at least 20 years, based on likely 15-year useful life of the current vehicle population and prospective additions to the fleet over the medium-term.

So energy independence will indefinitely depend on having some oil imports, admittedly at half or more below the peaks reached in the mid-2000s.  The US, however, could be readily energy independent from the perspective of electricity generation because of bountiful coal resources and growing availability of shale gas. 

Energy security for the US, therefore, must also hinge on providing for enhanced security of key sources of oil imports.  The same is true for China.  By contrast, for many countries in Europe and parts of Asia with more availability of mass transit and smaller distances for drivers generally, energy security hinges on inputs to electricity generation, notably natural gas.

National security requires healthy relations with strong, dependable allies.  Canada is a prime example of a strong US ally.  Retaining access to oil imports from Canada, now running at over 2 million barrels per day should remain a high priority for US energy security.  So too would efforts to engage Canada and Mexico in a hemisphere-wide initiative.

In the view of many Canadian private and public sector observers, however, Canada is being treated shabbily by serial delay in US approval of the proposed Keystone XL pipeline.  Delay is forcing transit via rail.  The latter is not as safe or as cost effective with the result that Canadian oil from Alberta faces discounts of up to $20 a barrel in the marketplace.

And from a purely domestic standpoint, the movement of 750,000 barrels per day of US tight oil is overstressing the rail system, resulting in both serious derailments of oil unit trains and creating other economically significant dislocations in the capacity of railroads to move other commodities, such as fertilizer, grains, and steel with a degree of efficiency.  

Losing the trust and respect of some Canadian leaders is now incentivizing them to reach out to China and other Asian energy-deficit countries jointly to develop pipelines to Canada’s West Coast for long-term shipments to the Asian market, either for oil, liquefied natural gas or both.  A deeper economic relationship between Canada and China, in particular, would seriously impair US energy security and further complicate US-China relations, already strained by Chinese belligerence in the east and south China seas.

Climate threats further confound energy and economic policy decisions.  For now, and well into the 2020s, the single largest contributor to CO2 emissions are coal-fired power plants, which are essential to sustaining rapid economic growth in energy-deficit Asian countries, especially China and India.  No meaningful response to concerns about climate change is feasible without large-scale cuts in coal use there and in several other emerging market countries. 

There is no obvious way for the US or European or other environmentally concerned countries to prod China and India to make convincing cuts in burning coal in the medium term.  Proposed cuts in US or European coal-fired power plants may assuage domestic critics, but will be viewed by Chinese and Indian leaders as largely symbolic. 

Technical advances to reduce greenhouse emissions are being pursued by research oriented universities and engineering centers in the US and elsewhere.  While several avenues appear promising, getting them out of the labs into industrial processes soon is proving to be nearly impossible.

European and Japanese business and academic experts are concerned that the US will practice a version of “resource nationalism” that the US normally strongly warns against elsewhere.  In part, this could take the form of worrying that the US Navy will withdraw from policing sea lanes, thereby jeopardizing the safe transport of merchandise across the globe.  In part, there is also a fear of shifting some of their industrial companies, and with it jobs, to the US due to the advantage of low natural gas and electricity prices.  These companies already own/control over half of the US chemical industry, so expansion is fairly straightforward.  This is described in the foreign media as unfair behavior by the US.

The US has a compelling comparative advantage in oil refining and has become a substantial net exporter of refined petroleum products, especially diesel.  Partly this is because of Europe’s own policies that discourage new or expanded refineries that are unpopular with voters.  Partly the US enjoys technical advantages gained through expertise in handling heavier Canadian and Venezuelan oil.  This competitive advantage would be further enhanced by construction of the Keystone XL pipeline.

The technological advantage that the US is currently enjoying in fracking will gradually wane and it is likely that numerous countries will begin to adopt the shale technologies in the coming years.  But by 2020, this will make only a modest contribution to global gas and tight oil supplies, given the various geological, water, legal and policy impediments that will not disappear overnight.

Technology on renewables continues to move ahead, but there is a big obstacle to a major shift in electricity generation:  the absence of sufficient storage battery capabilities.  Two CEOs of leading European energy companies cite this deficiency as the critical factor impeding wide market penetration by solar and wind generation.

Finally, it is worth noting that the world has experienced a number of major supply shocks during the same time period in which US tight oil development added over 2.5 million barrels per day to US output, with commensurate declines in US oil imports.  They include Libya, South Sudan, Iran (because of the impact of sanctions), Nigeria, and Syria.  Yet, volatility of global crude oil prices was less in those three years than in the previous twenty years.  This may have been a contributor to lessened US import demand. 

But more significant was the timely and robust responses of Saudi Arabia -- and until very recently Iraq -- as the swing producers in the OPEC cartel.  US diplomatic overtures to the Saudis were helpful in persuading them to play this market stabilizing role, even as the two countries do not always see eye-to-eye on many foreign policy challenges.