Tag: "oil prices"

Alaskan Oil Put on Ice With New Proposal

Last week, the Interior Department’s Bureau of Ocean Energy Management issued a five-year strategy that would open offshore drilling from Virginia to Georgia, but put previously deferred areas off the Alaskan coast off-limits, reports Politico.

While possibly good news for the Atlantic coast ― as well as the oil and gas industry ― the Alaskan delegation is far from pleased. Just last week, the Obama administration announced its intention to close of 12.28 million acres of Alaskan land from oil and gas exploration in the name of wildlife preservation.

“This administration is determined to shut down oil and gas production in Alaska’s federal areas ― and this offshore plan is yet another example of their short-sighted thinking,” said Senator Lisa Murkowski, the chairman of the Senate Energy and Natural Resources Committee in a statement. “The president’s indefinite withdrawal of broad areas of the Beaufort and Chukchi seas is the same unilateral approach this administration is taking in placing restrictions on the vast energy resources in ANWR and the NPR-A.”

While the Interior’s proposed plan does included three proposed lease sales in Alaska’s federal waters, Murkowski says it’s not enough. “The proposed lease sales we’re talking about right now aren’t scheduled until after President Obama is out of office,” Murkowski said. “Forgive me for remaining skeptical about this administration’s commitment to our energy security.”

Obama’s recent give-and-take oil and gas policy is particularly confusing in the wake of his State of the Union address, where he lauded the U.S.’s growth in production and drop in oil prices over the past year.

Feb 04, 2015 | Leave a Comment | by Megan Simons

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:

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.

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:

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.

Jan 28, 2015 | Leave a Comment | by Santiago Bello

Volatility Myth of Energy

Brookings Institution’s article claiming that falling oil prices will not hurt renewable “clean” energy wrongfully tries to make a comparison. Oil prices do fluctuate a good amount, and are part of a really good openly traded market. Renewable energy sources such as solar and wind, are not openly traded in a market and are heavily subsidized. This makes these two renewable energy sources over-priced and not yet ready for consumers. All energy sources are benefiting from improved technologies and domestic reserves and production forecasting are both increasing each year, doubling by 2021.

Increased oil production domestically and around the globe means lower oil prices and are good for the American consumer. It is still too early for renewable “clean” energy to be a viable option for Americans. Once energy sources like solar and wind are no longer supported by government and openly traded, then we will be able to compare them to other energy sources.

Jan 26, 2015 | 1 comment | by Lloyd Bentsen

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:

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 Slate.com 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

Jan 21, 2015 | 2 comments | by Santiago Bello

Senators Plan to Raise the Gas Tax

The American public may be cheering falling gas prices, but they have Congress talking. Democrats and Republicans alike have started tossing around the idea of increasing the gas tax. This controversial proposal, while not exactly new, is gaining attention on Capitol Hill.

How much money are we talking?

According to the U.S. Energy Information Administration, household gasoline expenditures are set to be the lowest in 11 years, with the average family spending around $550 less in 2015 than in 2014.

The current gas tax sits at 18.4 cents per gallon for gasoline and 24.4 cents per gallon on diesel. Proposals have been floated by congressman and economists alike to raise the tax by around 12 cents per gallon, bringing the tax up to 30 cents per gallon for gasoline.

Who supports the tax, and why?

While much of the support for raising the gas tax comes from the left side of the aisle, it’s gaining support on the right as well. In June, Senators Bob Corker (R-TN) and Chris Murphy (D-CT) proposed raising the gas tax by 12 cents per gallon. Back in 2011, Senator Lamar Alexander discussed raising the gas tax to fill transit fund gaps.

Additionally, Senate Environment and Public Works Chairman James Inhofe, Senate Finance Chairman Orrin Hatch, and Senate Commerce Chairman John Thune have all expressed openness to discussing increasing the tax.

Most supporters of raising the tax suggest that the extra income should be used to compensate for the dwindling Highway Trust Fund to pay for much needed road and bridge work around the country. Supporters argue that the gas tax is less of a “tax” and more of a “user fee,” shifting the cost of road repairs to the people who use the roads.

Yet opponents to raising the tax argue that while it may seem fair, innovations like increasing miles-per-gallon and fuel efficiency reduce the uses for the tax. Senator Roy Blunt at a business roundtable:

They thought the people using the roads were paying for the roads, and everybody that’s trying to keep this transportation network in place is concerned about more miles per-gallon, more fuel efficiency standards, all actually put the same amount of traffic and weight on the road, but they reduce the amount of money you have to do anything about it. It’s a concern at all levels.

Jan 14, 2015 | 2 comments | by Megan Simons

Keep Oil Prices Down by Passing Keystone XL

The Tampa Bay Times conducted a fact check on some statements made by Senator John Thune of South Dakota on Sunday. The fact check covered two main points:

―President Barack Obama’s own administration has done five environmental impact assessments of the Keystone XL pipeline

According to the fact check, the U.S. State Department actually had one report on the pipeline that included several drafts and a major revised version that considered a more environmentally sound route change in the pipeline.

―All of which have said it would have a minimum impact on the environment

While the State Department study found that the pipeline would have minimal impact on the environment, the Environmental Protection Agency worries of a greater impact from the pipeline’s greenhouse gas emissions than the study found.

The new Republican leadership in the Senate plans to have a friendly, open amendment process with Democrats with a goal of passing the pipeline bill. The bill is expected to have enough votes to be filibuster proof, and if not enough to override a presidential veto, enough to force the president to wield his veto pen and take a position on this controversial issue. The claim that gas prices are too low for the new addition to Keystone to have a positive economic impact does not consider that the pipeline will take time to build (and time to get approved) and by then, prices could be up even to record high prices.

Jan 05, 2015 | 1 comment | by Lloyd Bentsen

The Next Saudi Arabia? Lessons from Coober Pedy

In 1977, near the end of a decade of energy headaches, President Jimmy Carter addressed the nation in a speech that would bring the Department of Energy into fruition, give national attention to the need for the development of renewable resources, draw widespread criticism not only from OPEC-supporters but from scorned Americans and perhaps most importantly, state something we now know could be untrue.

World oil production can probably keep going up for another six or eight years. But sometime in the 1980s it can’t go up much more. Demand will overtake production. We have no choice about that.

― President Jimmy Carter

Fast-forward to June 2012. Leonardo Maugeri, a Senior Associate at Harvard’s Belfer School for Science and International Affairs, the Chairman for Ironbark Investments and a world-renowned oil expert published “Oil: The Next Revolution,” a major study that was funded by British Petroleum and utilized datasets and observations gathered by multitudes of oil exploration and extraction companies. Maugeri unflinchingly shattered through public belief regarding impending declining oil production, claiming “oil capacity is growing worldwide at such an unprecedented level that it might outpace consumption.”

But how true were these assertions, and what was his rationale?

Maugeri’s predictions came on the heels of breakthroughs in oil extraction technologies and methods such as fracking and horizontal drilling, but these innovations alone were not enough to explain the increase in supply.

In the analysis, Maugeri states that not only do these technologies allow us to further exploit existing reserves that were deemed inaccessible, but they will also be integral in extracting not millions or billions but potentially trillions of barrels of oil in undiscovered oil reserves “with no [supply] peak in sight.”

Fast-forward again to January 2013. A major oil discovery is found underneath Coober Pedy, Australia. How major? Brisbane Company Linc Energy estimated possible reserves to equal roughly 233 billion barrels of oil, roughly 30 billion barrels short of Saudi Arabia’s massive stock. For many reasons, however, we should be conservative in assessing the actual value of such a find. John Young who is a senior resources analyst at Wilson HTM, a prominent investment and wealth management company, asserts that we must gauge the actual quality of the oil find and determine what portion of the reserve is physically unrecoverable or economically unfeasible to attain as this may affect the yield and value of the find.

Though gargantuan by itself, the value of such a find is not just economic, but also symbolic of the enormous potential for untapped resources that lie undiscovered across the world.

Eerily, Maugeri predicted the discovery of new and huge oil reserves across the world and the rise of American tight-oil which we know as shale oil. Maugeri rationalized that the Brazilian Santos Basin Lula and Campos Basin, which both show extreme promise, as well as the new feasibility of shale trapped in Canada and the U.S. will shift production power to the Western Hemisphere while matching or even outpacing growing demand from developing countries such as China. Additionally, such a find could bring about a stable and long-term decrease in the price of oil. Finds like this suggest we have more time on our clock to deal with the many economic repercussions of energy supply than we originally thought.

–Santiago Bello is a research associate with the National Center for Policy Analysis

Dec 15, 2014 | 4 comments | by Lloyd Bentsen

The Demise of King OPEC

The rise of U.S. shale oil has signaled the beginning of the end for almighty King OPEC. But it has been Saudi Arabia that has hammered the nail in the coffin for the King. OPEC effectively worked in the 1970s influencing world oil supply and price because all members acted as a cohesive unit. Because of the enormous clout of growing U.S. shale oil, the Saudis now realize they can act with OPEC or act in their own self-interest. They can help raise the price of oil or maintain their market share in the United States. The Saudis realized that U.S. shale oil production is not going to decrease but increase in the coming years. Raising prices is a short-term solution that provides no long-term help for when the U.S. replaces Saudi Arabia as the World’s largest oil producer. Thus, the Saudis decided to keep prices low and maintain market share in the United States. With the World’s largest oil producer effectively bailing on the organization, OPEC can be seen as the once great giant that ruled the world with a black fist of gold and has now tumbled from his previously untouchable throne.

-Reeves Favrot is a research associate at the National Center for Policy Analysis

Dec 10, 2014 | 1 comment | by Lloyd Bentsen

The Oil Price War Could Be Bringing About Imminent Change

OPEC has declared open season on U.S. shale oil companies through its decision to leave oil production unrestricted. On separate accounts, Matt Phillips and Steve LeVine insist that “the fallout could create a crisis” in the American banking market as well as the energy industry, while Bloomberg notes how China has capitalized on this escalating feud.

American shale’s rise to power is largely credited to advancements in hydraulic fracturing, a method used by companies attempting to extract the resource from underground, as well as additional funding from junk bond investors who have been attracted by the high returns and low interest rates. Consequently, drilling companies both large and small have had an ample supply of credit and financing, such that 17 percent of the $1.3 trillion market is now financed exclusively by such contributions. With the abundance of equity, falling gas prices were to be expected as a simple byproduct of increased production.

In an unexpected response, OPEC signaled its unwillingness to reduce market share and kept production ― and hence future prices ― constant. Phillips and Levine warn that maintaining competitive prices has forced U.S. companies to dig into their profit margin. Normally this would not be a problem were it not for the prevalence of creditors and private owners bloating market value through their contributions. The desire to be on the energy-boom bandwagon has thus indirectly created a host of unfunded liabilities and nurtured an environment for assets such as receivables to fester and become toxic to the global banking system. Jan Stuart, the Director of Credit Suisse’s investment banking division issued a statement insisting “investors remain hungry for yield” and will remain so, deepening the divide between listed externally acquired funds and suffering shale oil companies’ ability to perform up to par.

While America stares down the looming double-threat, China has quietly begun increasing crude oil stockpiles by as much as seven-hundred thousand barrels per day amidst a fading “golden time window.” Bloomberg notes the steady progress taken by the creeping giant, even despite comparatively lackluster current and future growth of 7 percent as projected by fifty-six independent economists. At the current rate, the opportunist state hopes to stockpile 570 million barrels of crude by 2020, reserves equal to about 100 days of their domestic demand.

American lenders and shareholders must necessarily become more stringent with their credit and their capital when assessing companies. Phillips and Levine warn that there are negative “implications for everyone” from hydraulic fracking fields to Wall Street if financing dries up or if OPEC succeeds in destabilizing American shale, but in a time when the rising industry could be facing one of its greatest global triumphs or defeats, this is clearly an understatement.

Santiago Bello is a research associate at the National Center for Policy Analysis.

Dec 08, 2014 | 2 comments | by Lloyd Bentsen

United States to be #1 Energy Producer by 2020

At the current rate of energy resource production, the United States is set to surpass Saudi Arabia and become the top oil producer in the world as early as the year 2020. The U.S. also has huge natural gas reserves that are larger than Russia’s reserves.

Energy booms are also happening in Canada and Mexico. North America will soon be a major energy market player in the world. As regulations and restrictions to oil and gas exportation are lifted, the U.S. will be able to provide places, such as Europe, with much needed energy resources and relief.

The U.S. oil/gas trade balance:

Deficit of $354Bn in 2011
Breakeven by 2018
Surplus of over $80Bn in 2020

Rising oil and gas production and exportation in North America will greatly reduce any and all imports and completely change the entire geopolitical energy and power structure in the world.

Dec 01, 2014 | 5 comments | by Lloyd Bentsen

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