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Evolving Energy Infrastructure — Energy Battles Looming at Home

The electrical utilities industry is one that has always been regarded by economists as unique, with its most defining aspect being competition. There is little to none. However, economists have always argued that this is only a rational byproduct of the infrastructure associated with transporting energy. A perfectly competitive market is saturated with companies, and with hundreds or even thousands of different energy companies, the power lines and facilities required to generate electricity would be astronomically inefficient. For this reason, infrastructure in this field has been widely shielded from the pressures brought by rival businesses and increasingly demanding customers.

The free market could be on the verge of changing these norms. It all begins with introducing an adversarial element to the electrical utilities sector.

Vivek Wadhwa, a fellow at the Rock Center for Corporate Governance at Stanford University and the director of research at Duke’s Center for Entrepreneurship and Research Commercialization begins the topic of evolving energy at its root: Many forms of energy are outdated or considered too dangerous. President Obama’s recent energy accords in India is an example of this, with Wadhwa stating,

This is hardly a victory for the United States or for India. It no longer makes sense for any country to install a technology that can create a catastrophe such as Chernobyl or Fukushima — especially when far better alternatives are available.

Furthermore, Wadhwa points out that nuclear facilities and growth in the nuclear energy sector has been stagnant compared to coal, natural gas and renewables, a claim largely supported by the Energy Information Administration’s statistics on U.S. energy consumption.

The president should not be prescribing medicine [to electrical consumption] that he would not take himself.

Historical Electricity Generation

In a 2014 report, “Energy 2020: The Revolution Will Not Be Televised as Disruptors Multiply,” Citigroup claims that coal has suffered a serious double threat with the resurgence of natural gas during America’s shale revolution, and most surprisingly the projected ― not current ― falling costs of solar energy.

Indeed, natural gas and renewables such as solar are also the only two major methods of energy production which have consistently expanded at a positive rate for many years. Oil has historically been rarely used by electrical utility companies, and hydroelectric energy ― which does account for significant amounts of energy in the U.S. ― has largely been stagnant in meeting our rising demand for energy.

Historical Electricity Generation by Source

The growing popularity of renewables such as solar and wind has been a phenomenon that has been observed mainly in Europe. In a separate article, “The Coming Era of Unlimited ― and Free ― Clean Energy,” Wadhwa explains many countries in Europe have reached grid parity, a state in which installing electrical grids powered by wind and photovoltaics have matched energy prices from conventional electrical power plants. Were such a phenomenon to begin in the United States, it would be horrible news for coal, which is already hobbling along, largely due to the higher costs imposed by environmental regulations.

Solar and wind’s capacity for powering microgrids — grids which operate in the local vicinity in which their consumers reside — could also put pressure on the entire infrastructure that American energy needs have relied on for years. America’s energy infrastructure is also vastly outdated — with the best example of such being the Northeast’s chronically faltering electrical grid. The lack of innovation and improvement is mainly due to the lack of competition in the sector. Though solar and wind energy is still years away from being able to match domestic prices, advances in microgrid popularity which would be enabled by Citi’s projected foreign investment in the two energies could introduce choice to the energy sector, effectively lowering prices and helping America in its quest to be energy independent.



Toxic Assets, Financial Sector Projections and… Bubbles?

As many economically-informed Americans know, the Great Recession of 2007 was instigated largely by belligerent lending by some of the largest banks in the United States — specifically a crisis started by aspiring homeowners and banks, who both overestimated the future value of the home, and investors who largely misunderstood the financial instruments called derivatives, whose market value originated from those same home loans.

Today, we see a similar ― albeit more contained ― trend of toxic assets permeating the banking sector… instead however, this trend is originating from the energy market:

Energy and Financial Sector Indicies

From a simple aesthetic perspective, it appears that the financial sector is closely following the gains and losses in growth held by the energy sector ― however this is an observation that can also be statistically and scientifically reaffirmed.

The regression below simply shows a close-knit positive correlation between standardized changes in the two indices. The two sectors expand and contract in close unison, surprisingly with very few instances of outliers.

Financial Sector vs Energy Sector

This financially symbiotic relationship is indicative of a heavy amount of investment by the banking and financial services industry, in the energy industry. Indeed, Seeking Alpha, an online finance and investment research platform proclaims that the Fed’s “relentless interest rate repression,” is credited as the main reason investors turned their back to safer investments in lieu of junk bonds within the energy industry. These specific bonds have been previously been regarded as a source of more stable and higher yielding returns, especially in in the post-recession years. Now however, Main Street investors are playing hot-potato with them, in a manner is oddly similar to the treatment of Mortgage-Backed Securities in 2007-08. Investors are preferring instead to sell them to the smaller influx of Wall Street players such as Goldman Sachs, who tout the precipitously falling value of these bonds as all the more reason to expect higher future returns. But will there be a resurgence in the value of these bonds? At least to their normal level of profitability? Perhaps, but as the Fed begins to hike interest rates, and OPEC continues suppressing prices, it is unlikely that they will ever be viewed to be as attractive as they once were.

Lastly, it is important to highlight a recent departure from the norm in the financial sector that has been in development since the 3rd quarter of 2014:

Standardized NYSE Energy and Financial Sectors

Though the two industries still mirror changes within each other, the financial Sector has become increasingly better-off relative to the energy sector. Why? Reasons could include finally hedging investments against volatility in the oil sector, and the renewables sector which has only become less competitive since OPEC’s November announcements… Many of these financial intermediaries however, have not abstained from investments in energy firms and already have outstanding loans that their debtors in the oil business are becoming more and more prone to defaulting on. It is likely that we are simply seeing a lag in the financial sector.

In the same manner that the accumulation of ripples from defaulting on mortgages began the economic tsunami of 2007, the oil industry has the potential to seriously hurt investors abroad and the American financial sector. Sustained or dropping oil prices will only magnify the rate at which public and private assets become the seeds of contagion.





SOTU NCPA: The Invisible Hand and Unabated Oil Production

In OPEC’s 2014 World Oil Outlook (WOO), the energy giant projects sustained oil prices of over $100 per barrel for 2015 with slight drops in future oil prices as low as $95 per barrel…

Recent events have proven their short-run projections to be dead wrong.

In his State of The Union (SOTU) Address, President Obama came well-stocked (though certainly not well-received in the new Republican House and Senate) with good economic news which he readily used as ammunition to suppress critics. However, some of these developments, such as descending oil prices, are difficult to assign responsibility to.

What can easily be correlated is oil prices and popularity.

Throughout the night, the President acted triumphant and suave — touting what CNN claims to be above a 50% approval rating — it was as if President Obama came into Congress surfing on America’s wave of cheap oil. However, a sobering realization is that this same wave is what crashed down on President Jimmy Carter’s political career in 1979, as oil prices rose by approximately $60 a barrel, Carter’s approval rating subsequently sank to new depths below 30%.

Though the President is a fundamental player with substantial power in the private arena as well as the public, history has made it clear that the global forces determining supply and demand still reign supreme.

With respect to the agents of supply and demand: Citi’s New York-based investment bank is sounding the alarm that these oil prices may be here to stay, and in an increasing scramble to create economies of scale, there are increasing murmurs of mergers in the American oil and gas industry. Citi’s claims champion innovations such as hydraulic fracturing and horizontal drilling as being the reasons we can expect full oil and gas independence by 2020, if not sooner.

However, these claims are not without skepticism, after the beginning of the U.S. oil and fracking boom, the U.S. Energy Information Administration (EIA) published a more conservative timeline of U.S. oil import balances. Without omission of data and with proper considerations below, the NCPA has juxtaposed the two forecasts for your own judgment:

Oil Deficit and Surplus

Important Disclaimers:

  • Citigroup’s oil balances study “Energy 2020: Out of America,” was conducted more recently than the EIA’s study, “AEO2014 Early Release Overview.” It is possible that newly available data on the oil and fracking boom made their study more accurate
  • Citigroup undoubtedly holds financial claims with its affiliates in the crude oil and natural gas sectors, affiliates who may be looking to repeal the 1975 Energy Policy and Conservation Act, an antiquated government policy barring the export of oil from the U.S. If so, Citigroup has both political and financial motives to overstate growth in domestic oil and gas production
  • Likewise, the U.S. Energy Information Administration (EIA) may have strong political pressures to underestimate future domestic production

What is certain however, is that the collateral effects of a sustained increase in American supply would redefine the global environment for businesses and governments:

  • Business Insider notes, these low prices make way for the perfect time in which price-distorting subsidies worth billions of dollars could be erased without a major blow to the U.S. economy
  • Goldman Sachs and assert that a decrease in overall drilling activity, while an increase in its efficiency has already amounted to a $75 billion tax-cut for Americans, a growing figure which they believe will become more valuable in the hands of middle-class Americans rather than in oil companies where much of the revenue may be redirected into the pockets of foreign investors. Similarly, during the SOTU Address, President Obama stated “the typical family this year should save $750 at the pump,” which amounts to a little over $80 billion in savings
  • Reuters proclaimed that new permits issued for oil drilling fell by 40% in 2014, a reflection of oil prices… this is a statistic that also represents the trend of unprofitable prospects in exploration, one which may slow the discovery of large oil reserves and distort “peak oil” claims
  • During the SOTU Address, President Obama touched upon perhaps the most important point, “we are as free from the grip of foreign oil as we’ve been in almost 30 years.” Indeed, and if Ted Cruz successfully repeals the Energy Policy and Conservation Act, the geopolitical leverage of groups such as OPEC and countries such as Russia would begin to erode in a way we have yet to see, and perhaps permanently

Looking Under the Crust ― Seismic Activity, Fracking and Graphs

Texas has always been a battleground between skeptics and environmentalists, but a developing trend of seismic activity has also turned it into a promising research laboratory for scientists and seismologists.

Volcano Discovery, a group of scientists dedicated towards the global study of volcanoes and earthquakes alike published the following figures which the NCPA has reformatted without tampering or omissions of data:

quake freqency texas

Important disclaimers include:

  • the final apparent drop in seismic activity, which may simply be due to the fact that we are only halfway into January
  • an omission of point for November in 2013, for which there was no data
  • However, the most important fact uncovered, is that though this chart measured the frequency of the earthquakes, further analysis of data collection methods, times and earthquake locations has led us to believe that there is significant double-counting occurring in this data… Meaning that two or three different cities may have noted the same tremor, yet the data was recorded as multiple bouts of seismic activity.

Regardless of this skew, and the likelihood for overstatement in this data, it is difficult to refute the clear trend in this chart. Indeed, the Dallas Morning News states,

There is evidence that some central and eastern North America earthquakes have been triggered or caused by human activities that have altered the stress conditions in earth’s crust sufficiently to induce faulting.

According to the Dallas Morning News, these activities include what you would expect,

… impoundment of water behind dams, injection of fluid into the earth’s crust, extraction of fluid or gas, and removal of rock in mining or quarrying operations…

But even if these tremors are truly increasing in frequency due to fracking and fuel extraction, is it really a threat to Texas’ lives and infrastructure? There is no recent record of significant damage due to tremors in Oklahoma or Texas, what’s more many of these tremors are occurring in areas where the population density can be as low as five people per square mile… denoting a very rural or sparse suburban setting.

Six months of data from Volcano Discovery’s records were randomly selected and analyzed for changes in magnitude and depth of Texas earthquakes:

magnitude texas quakes

depth of texas quakes

Depth has decreased and magnitude has increased, however in assessing these results, we always must prioritize one of the most basic rules of statistics: Correlation is not causation. What’s more, a larger sample of months can give more definitive results. There is still much research to be done on the origin of these earthquakes, and not enough risk to human life and private/public capital given what we know, at least not enough to make drastic decisions set forth by some environmental groups.