I'm annoyed by the sudden anger with oil companies for paying out big dividends. That's what you're supposed to do in a dying industry - give the money back to your investors so they can go reinvest it in something else. That's what moving away from oil looks like!
Energy policy around 'The West' is downright stupid. We have spent the last few years making policies making it more difficult to drill for more oil and gas, and more difficult to get those companies to raise finance. The policies were half hearted and not designed to work effectively, but likely had an impact on the margin. Complaining that companies aren't drilling enough is rich given that a year ago we didn't want them to drill.
As for Germany, I haven't got a clue what they were doing. A few months ago, the plan was to close nuclear plants and open a new gas pipeline from the hostile regime nearby. Now the plan is to totally reverse this, after the hostile regime blindsided everyone by doing something hostile.
As always, the problem is a failure to own the fact that trade-offs need to be made. We would prefer nuclear plants not to be working with dangerous radioactive stuff, but nuclear is the nearest thing we have to an actionable solution to both climate change and ensuring reliable energy for all. Renewables can produce a lot of electricity but they don't appear to be very reliable when there is no wind and limited sun intensity. If an environmentalist can suggest what a non-nuclear solution is to this problem that doesn't involve living like a feudal peasant, I'm all ears.
I’m really surprised by how dishonest that read of the “cost of carbon” dispute was. The administration introduced the concept as a way to limit Oil Leases without risking legal challenge by banning them outright. That’s why they responded to the stay by pausing all leases. It’s the exact same policy approached in different ways.
To frame it as DOI just trying to be fair with costs and then getting jammed by a judge is just not what is happening here.
I agree that’s not what’s impacting gas prices, but you can’t pretend the admin didn’t think/hope that 2019 supply increases had put a ceiling on price and they could take advantage by limiting domestic drilling without a political hit. They’ve said as much themselves.
The one thing missing from this analysis is that "now more than ever" these Big Oil companies are being faced with their first almost existential risk, in the push away from ICE vehicles worldwide by governments, etc.
While that will not eliminate demand for gasoline or oil, it will at least impact out that in such a way that under the right circumstances a recession driven demand crash could threaten some of the poorly situated majors.
Additionally, you had many people screaming that we should "let them fail!" back in 2020 when oil companies got access to American Rescue Plan momeny....
So now there is a perpetual fear in corporate leadership that the next Bust will be "the big one"....and no one wants to be caught off guard with lots of debt on the books for future production they won't need.
I work in the energy sector. Specifically on gas turbine power plants. Except I have nothing to add. Though I will point out that even power plant users of Natural Gas can profit from higher prices. Gas prices increase 20%. Electricity rates will also increase by 20%. This is a generalization… but the Utilities 10% profit margin is higher with higher prices. Now admittedly Utilities will move to other energy sources. Who in turn will also profit from higher prices, but be relatively cheaper. In the short term it doesn’t really help renewables since they (especially solar) already provide max capability. I am sure on the margins there will be increased capability built though in the future. The big winner is Coal. They also have latent capability to sub in for Gas… however the Utility are also balancing CO2 requirements.
I guess I did have something to say. Postscript. I’d like to see more investment in research. Batteries, Solar, and Nitrogen.
On a side note…. Nitrogen is one of those always promised technologies… but one good thing is you can mix Hydrogen with natural gas. And end up with turbines that burn cleaner. It also makes it easier to transport. That is nitrogens one advantage. It’s not an either or thing. As the capability to produce nitrogen matures, you can just introduce it into the fuel supply. Note I am simplifying here.
My company Siemens Energy is investing a lot of money in HYDROGEN production and gas turbins that can handle the embrittlement and heat from HYDROGEN .
Anyway, I hope everyone is doing good. I am at a job up north of Pittsburgh right on the Ohio border. Have a great day.
Just as a very broad statement, it's stupid to fight climate change by making fossil fuels more expensive when you could instead fight climate change by making zero-carbon energy sources less expensive. Instead of increasing taxes on carbon, increase "negative taxes" on zero-carbon energy. This is not a false choice. The current progressive position is to do both, but we should instead do half as much of the former and twice as much of the latter.
On the subject of increasing production and specifically towards your comment that oil companies have already started drilling the “best wells” so any additional investment would be directed towards less optimal wells:
While that’s obviously true, one data point that is interesting, which was mentioned at CERAWeek in Houston this week, is that if you look at the IRR for oil and gas projects for new investments that have reached FID (final investment decision) there is clearly a higher standard for new oil projects. Traditionally, oil and gas companies target a 15% IRR for new projects and we see that with gas projects that have been green lighted. In contrast, new oil projects are projecting IRRs of 30-40% which is a very high bar, and reflects the uncertainty in future demand and regulatory change. Those IRRs are driven by the financial industry and investors.
Whilst reading this article I kept thinking there was one solution that could really hit both problems - the reluctance of domestic energy producers to invest in new output, and decarbonisation. A minimum domestic oil price.
The Federal Government sets a floor for oil prices in the US (below the current price but at a price that still makes most shale production viable) and restricts imports. This gives producers the security to invest in domestic production. However a minimum floor for oil prices also stimulates investment in green energy, because it makes alternative methods of energy production more effective.
It has all the usual drawbacks of these kinds of interventions - overproduction, general market distortion and the vested interests thereby created would make it difficult to adjust policy once the policy had outlived its purpose. But in the medium term at least it could prove useful in dealing with current problems.
>> Elon Musk is right that Europe should reverse its de-nuclearization. For some reason maybe related to his solar power business, Musk didn’t mention that basically the same logic applies to Diablo Canyon and Indian Point and other facilities in the United States.
It's disappointing to see Matt jump on this bandwagon without doing some research on the economics that's driving these closures. No one told PG&E it has to close Diablo. The plant is being closed because it can't compete and it's getting less and less competitive as more and more cheap renewables and battery storage get added to the grid.
The reason for this is something called the "merit order effect." Generation on a grid is scheduled based on the marginal cost of running each available generator. The cheapest generators are scheduled first, then more and more expensive generators get scheduled until load can be satisfied. The problem for nuclear power is that compared to most other generators, its very expensive to schedule (eg has higher marginal cost). In addition, its inflexibility (eg can't run for just a few hours) makes this problem much much worse. To satisfy a 4-8 hour energy shortfall after the sun sets with nuclear power means signing up for 3-4 days of expensive nuclear power output.
Once a grid has renewable generators satisfying most of the load, grids end up with an excess of power for several hours of each day, then a shortfall for a few hours after the sun sets (if it's not windy). It turns out that batteries are a very economic solution to this problem because they can charge very cheapy with low or zero cost energy during periods with excess generation, then instantly turn on during periods when renewables aren't generating enough to satisfy load.
Re "swing-producers": can freshly drilled oil be stored easily, if someone builds the capacity? I know there's a "strategic petroleum reserve" that the government has. Could a company build sufficient storage to justify running wells even when oil prices are low so they can sell the oil later when prices are high? I realize some oil speculation is essentially "leave oil in the ground when prices are low and get it when they're high" but since the price variance is high (and will remain high, given geopolitics), there's room for a faster responder: in high-price times, releasing from storage would be much faster than reactivating idle wells.
There's gotta be a billionaire or company that can build a bunch of storage - again, assuming oil doesn't, like, go bad like gasoline does - near the relevant oil fields.
An excellent in-depth analysis. I spent the first half of my corporate finance career working for an oil and gas producer (long since swallowed up by multiple mergers). Oil (and natural gas) price volatility is the single biggest obstacle to stable levels of both capital investment and employment. And on the consumer side, who wants to buy an expensive electric vehicle if there’s a decent prospect that a year from now, gasoline will be relatively cheap again? So I think both the price-driven refilling of the SPR and imposing higher (but price-sensitive) taxes on gasoline are excellent ideas.
For the short term in terms of oil availability, this seems like an excellent time to not just do something, but stand there. Oh cosmetic things, like opening the SPR, are fine, if that helps calm the public's nerves. But in terms of opening of new areas for exploration or making drilling easier, then no.
World oil demand is about 100M barrels/day. Russian exports are around 5M. Take those away (or make it appear that that will happen) and surely prices will spike. And it would be great if our wonderful allies in the Persian Gulf stood with the civilized world and opened up the spigots a bit more to make a dent in that 5M barrel hole, but that's not how they roll, and I seriously hope we have some frank discussions with them after this is over.
But the US can make up a big chunk of that just by the magic of the market. US oil production reached a historical peak in February 2020, with 13.1M barrels/day. With COVID, production fell 30% by August 2020. It's now recovered to 11.6M barrels/day (https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart).
That huge runup ending in early 2020 came when West Texas Intermediate prices hovered in the low $50/barrel range. As of this morning, it's $110/barrel. I assume that the 1.5M barrel/day difference between now and two years ago is mostly from capping wells or slowing extraction from working wells. While I'm not a petroleum engineer, I imagine it's not too hard to crank those up again and get that 1.5M back on line fairly quickly. Even more, I assume we weren't producing flat out even at 13.1M/day and with the incentive of a doubled price, we could probably push production from current wells above the historic high, even with no new exploration or drilling.
In other words, just through market incentives and just here in the US, we could make a huge dent in the Russian deficit. And turning a blind eye toward Venezuelan and Iranian exports to other markets in the world would bring that down even more.
Lots of good stuff in this post on longer-range issues, but otherwise, I'd say let's wait for the market to work.
I'm annoyed by the sudden anger with oil companies for paying out big dividends. That's what you're supposed to do in a dying industry - give the money back to your investors so they can go reinvest it in something else. That's what moving away from oil looks like!
Energy policy around 'The West' is downright stupid. We have spent the last few years making policies making it more difficult to drill for more oil and gas, and more difficult to get those companies to raise finance. The policies were half hearted and not designed to work effectively, but likely had an impact on the margin. Complaining that companies aren't drilling enough is rich given that a year ago we didn't want them to drill.
As for Germany, I haven't got a clue what they were doing. A few months ago, the plan was to close nuclear plants and open a new gas pipeline from the hostile regime nearby. Now the plan is to totally reverse this, after the hostile regime blindsided everyone by doing something hostile.
As always, the problem is a failure to own the fact that trade-offs need to be made. We would prefer nuclear plants not to be working with dangerous radioactive stuff, but nuclear is the nearest thing we have to an actionable solution to both climate change and ensuring reliable energy for all. Renewables can produce a lot of electricity but they don't appear to be very reliable when there is no wind and limited sun intensity. If an environmentalist can suggest what a non-nuclear solution is to this problem that doesn't involve living like a feudal peasant, I'm all ears.
Who are the people in the Jones Act lobby and how are they so powerful? How many jobs does it actually represent?
I’m really surprised by how dishonest that read of the “cost of carbon” dispute was. The administration introduced the concept as a way to limit Oil Leases without risking legal challenge by banning them outright. That’s why they responded to the stay by pausing all leases. It’s the exact same policy approached in different ways.
To frame it as DOI just trying to be fair with costs and then getting jammed by a judge is just not what is happening here.
I agree that’s not what’s impacting gas prices, but you can’t pretend the admin didn’t think/hope that 2019 supply increases had put a ceiling on price and they could take advantage by limiting domestic drilling without a political hit. They’ve said as much themselves.
Good thing Twitter progressives and progressive staffers don't exist entirely in the fantasy world you mentioned in the final sentence.
The one thing missing from this analysis is that "now more than ever" these Big Oil companies are being faced with their first almost existential risk, in the push away from ICE vehicles worldwide by governments, etc.
While that will not eliminate demand for gasoline or oil, it will at least impact out that in such a way that under the right circumstances a recession driven demand crash could threaten some of the poorly situated majors.
Additionally, you had many people screaming that we should "let them fail!" back in 2020 when oil companies got access to American Rescue Plan momeny....
So now there is a perpetual fear in corporate leadership that the next Bust will be "the big one"....and no one wants to be caught off guard with lots of debt on the books for future production they won't need.
I work in the energy sector. Specifically on gas turbine power plants. Except I have nothing to add. Though I will point out that even power plant users of Natural Gas can profit from higher prices. Gas prices increase 20%. Electricity rates will also increase by 20%. This is a generalization… but the Utilities 10% profit margin is higher with higher prices. Now admittedly Utilities will move to other energy sources. Who in turn will also profit from higher prices, but be relatively cheaper. In the short term it doesn’t really help renewables since they (especially solar) already provide max capability. I am sure on the margins there will be increased capability built though in the future. The big winner is Coal. They also have latent capability to sub in for Gas… however the Utility are also balancing CO2 requirements.
I guess I did have something to say. Postscript. I’d like to see more investment in research. Batteries, Solar, and Nitrogen.
On a side note…. Nitrogen is one of those always promised technologies… but one good thing is you can mix Hydrogen with natural gas. And end up with turbines that burn cleaner. It also makes it easier to transport. That is nitrogens one advantage. It’s not an either or thing. As the capability to produce nitrogen matures, you can just introduce it into the fuel supply. Note I am simplifying here.
My company Siemens Energy is investing a lot of money in HYDROGEN production and gas turbins that can handle the embrittlement and heat from HYDROGEN .
Anyway, I hope everyone is doing good. I am at a job up north of Pittsburgh right on the Ohio border. Have a great day.
Just as a very broad statement, it's stupid to fight climate change by making fossil fuels more expensive when you could instead fight climate change by making zero-carbon energy sources less expensive. Instead of increasing taxes on carbon, increase "negative taxes" on zero-carbon energy. This is not a false choice. The current progressive position is to do both, but we should instead do half as much of the former and twice as much of the latter.
On the subject of increasing production and specifically towards your comment that oil companies have already started drilling the “best wells” so any additional investment would be directed towards less optimal wells:
While that’s obviously true, one data point that is interesting, which was mentioned at CERAWeek in Houston this week, is that if you look at the IRR for oil and gas projects for new investments that have reached FID (final investment decision) there is clearly a higher standard for new oil projects. Traditionally, oil and gas companies target a 15% IRR for new projects and we see that with gas projects that have been green lighted. In contrast, new oil projects are projecting IRRs of 30-40% which is a very high bar, and reflects the uncertainty in future demand and regulatory change. Those IRRs are driven by the financial industry and investors.
Whilst reading this article I kept thinking there was one solution that could really hit both problems - the reluctance of domestic energy producers to invest in new output, and decarbonisation. A minimum domestic oil price.
The Federal Government sets a floor for oil prices in the US (below the current price but at a price that still makes most shale production viable) and restricts imports. This gives producers the security to invest in domestic production. However a minimum floor for oil prices also stimulates investment in green energy, because it makes alternative methods of energy production more effective.
It has all the usual drawbacks of these kinds of interventions - overproduction, general market distortion and the vested interests thereby created would make it difficult to adjust policy once the policy had outlived its purpose. But in the medium term at least it could prove useful in dealing with current problems.
>> Elon Musk is right that Europe should reverse its de-nuclearization. For some reason maybe related to his solar power business, Musk didn’t mention that basically the same logic applies to Diablo Canyon and Indian Point and other facilities in the United States.
It's disappointing to see Matt jump on this bandwagon without doing some research on the economics that's driving these closures. No one told PG&E it has to close Diablo. The plant is being closed because it can't compete and it's getting less and less competitive as more and more cheap renewables and battery storage get added to the grid.
https://www.utilitydive.com/news/pge-proposes-64-gwh-battery-storage-plan-in-response-to-californias-115/617646/
The reason for this is something called the "merit order effect." Generation on a grid is scheduled based on the marginal cost of running each available generator. The cheapest generators are scheduled first, then more and more expensive generators get scheduled until load can be satisfied. The problem for nuclear power is that compared to most other generators, its very expensive to schedule (eg has higher marginal cost). In addition, its inflexibility (eg can't run for just a few hours) makes this problem much much worse. To satisfy a 4-8 hour energy shortfall after the sun sets with nuclear power means signing up for 3-4 days of expensive nuclear power output.
Once a grid has renewable generators satisfying most of the load, grids end up with an excess of power for several hours of each day, then a shortfall for a few hours after the sun sets (if it's not windy). It turns out that batteries are a very economic solution to this problem because they can charge very cheapy with low or zero cost energy during periods with excess generation, then instantly turn on during periods when renewables aren't generating enough to satisfy load.
Re "swing-producers": can freshly drilled oil be stored easily, if someone builds the capacity? I know there's a "strategic petroleum reserve" that the government has. Could a company build sufficient storage to justify running wells even when oil prices are low so they can sell the oil later when prices are high? I realize some oil speculation is essentially "leave oil in the ground when prices are low and get it when they're high" but since the price variance is high (and will remain high, given geopolitics), there's room for a faster responder: in high-price times, releasing from storage would be much faster than reactivating idle wells.
There's gotta be a billionaire or company that can build a bunch of storage - again, assuming oil doesn't, like, go bad like gasoline does - near the relevant oil fields.
An excellent in-depth analysis. I spent the first half of my corporate finance career working for an oil and gas producer (long since swallowed up by multiple mergers). Oil (and natural gas) price volatility is the single biggest obstacle to stable levels of both capital investment and employment. And on the consumer side, who wants to buy an expensive electric vehicle if there’s a decent prospect that a year from now, gasoline will be relatively cheap again? So I think both the price-driven refilling of the SPR and imposing higher (but price-sensitive) taxes on gasoline are excellent ideas.
For the short term in terms of oil availability, this seems like an excellent time to not just do something, but stand there. Oh cosmetic things, like opening the SPR, are fine, if that helps calm the public's nerves. But in terms of opening of new areas for exploration or making drilling easier, then no.
World oil demand is about 100M barrels/day. Russian exports are around 5M. Take those away (or make it appear that that will happen) and surely prices will spike. And it would be great if our wonderful allies in the Persian Gulf stood with the civilized world and opened up the spigots a bit more to make a dent in that 5M barrel hole, but that's not how they roll, and I seriously hope we have some frank discussions with them after this is over.
But the US can make up a big chunk of that just by the magic of the market. US oil production reached a historical peak in February 2020, with 13.1M barrels/day. With COVID, production fell 30% by August 2020. It's now recovered to 11.6M barrels/day (https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart).
That huge runup ending in early 2020 came when West Texas Intermediate prices hovered in the low $50/barrel range. As of this morning, it's $110/barrel. I assume that the 1.5M barrel/day difference between now and two years ago is mostly from capping wells or slowing extraction from working wells. While I'm not a petroleum engineer, I imagine it's not too hard to crank those up again and get that 1.5M back on line fairly quickly. Even more, I assume we weren't producing flat out even at 13.1M/day and with the incentive of a doubled price, we could probably push production from current wells above the historic high, even with no new exploration or drilling.
In other words, just through market incentives and just here in the US, we could make a huge dent in the Russian deficit. And turning a blind eye toward Venezuelan and Iranian exports to other markets in the world would bring that down even more.
Lots of good stuff in this post on longer-range issues, but otherwise, I'd say let's wait for the market to work.
I have been been on Variable Oil Tax island for years, preferably with indexed brackets.
Dumb question: why don’t administrations use the strategic petroleum reserve to lower gas prices before elections? Illegal?