Environmentalism and the Anarchy of the Market

Revealing developments going on at the moment on the world energy market. Coal has seen its price halved in the past year. The price of oil has fallen. The oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $70. This comes after nearly five years of stability. and some oil-producing countries want the OPEC cartel to restrict production so as to put up prices. The question being asked is why the Saudis haven't themselves cut back production as they have done in the past. There are, of course, a number of conspiracy theories. 

According to the Economist curbing their output to once again raise its price would benefit Iran and Russia. More likely but not necessarily solely the reason this is being opposed by Saudi Arabia which wants to keep the price low so as to discourage fracking. Saudi Arabia can tolerate lower oil prices quite easily for quite a while. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground. Low prices stem investment in other sources of oil, such as Canada’s tar sands or America’s shale, that means more demand for low-cost ‘dirtier’ coal in future.

The U.S. is producing more than 3 million barrels a day than it did several years ago. As Robert Bryce of the Manhattan Institute points out, this is like adding another Kuwait to world oil production. The Marcellus shale in Pennsylvania alone, he writes, has added another Iran to world natural-gas production. And it is fracking that is doing it. 

According to the Institute for Energy Research, "Nearly every barrel of new U.S. oil production can be attributed to the use of horizontal drilling and hydraulic fracturing technologies."...

In fact, the International Energy Agency has predicted that the United States will produce more oil next year than Saudi Arabia; the US  might even pass Russia, which, at ten million barrels a day, is the world’s biggest producer. (it already produces more natural gas than Russia.)

Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day,  just a 1m b/d short of Saudi Arabia’s output. US domestic demand has apparently plateaued so this extra production is going on to the world market. The boss of Continental Resources, Harold Hamm (whose fortune has dropped by $11 billion since July), has said he can cope as long as the oil price is above $50. Stephen Chazen, who runs Occidental Petroleum, has said the industry is “not healthy” below $70. The uncertainty reflects the diversity of activity. Wells produce different mixes of oil and gas (which sells for less). Transport costs vary: it is cheap to pipe oil from the Eagle Ford play, in Texas, but expensive to shift it by train out of the Bakken formation, in North Dakota. Firms use different engineering techniques to pare costs.

The pain of this competition will be borne more by those new players who wish to enter the industry as many companies in the UK seek to do. Wells that are producing oil or gas are extraordinarily profitable, because most of the costs are sunk. Taking a sample of eight big independent firms, average operating costs in 2013 were $10-20 per barrel of oil (or equivalent unit of gas) produced—so no shale firm will curtail current production. But the output of shale wells declines rapidly, by 60-70% in their first year, so within a couple of years this oil will stop flowing. It is far less clear if the industry can profitably invest in new wells to maintain or boost production.  With their revenues now dropping fast, they will find themselves overstretched. A rash of bankruptcies is likely.

Neverthelesss, the global oil economy, despite the ‘green’ goals, will be around for several decades.

"The largest companies in the energy industry have concluded that policymakers are unlikely to act quickly enough to strand their current fossil fuel assets or make it unprofitable for them to continue exploring for new reserves. The oil and gas sector, in particular, is gambling on a business-as-usual model that projects out to a roughly $14 trillion investment in new reserves by 2035. This investment would correspond to a staggering amount of wasted capital should policymakers decide that these reserves cannot be burned." 

What this shows is the impossibility of a rational energy policy under capitalism as energy use under it reflects the relative prices of the various sources (coal, oil, gas, shale oil, etc) and changes as they vary. There's also a lesson for those who want to campaign against the use of fracking under capitalism. They should be careful what they wish for. They may get fracking slowed but not replaced by renewable sources as these are too costly at the moment but by ... oil and coal. Another reason the environmentalist shouldn't like it is that a fall in oil price is a boost for general economic growth. Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers.

It highlight the utopianism of environmentalists who think shaping the market is a solution. Just too many variables. Price collapses, need for alternative sources such as renewables collapses , price rises, need for alternative sources becomes a profitable proposition. Environmentalists are generally not happy because lower gas prices lead to more use. And more use puts more pollutants in the air. But every cloud has a silver lining since it means that critics of the Keystone XL pipeline project will be happy because lower oil profits may very well kill the project. The market price drops enough to make tar sands oil barely profitable, adding the cost of an expensive pipeline may be foolish from a business perspective. Activists may squabble pro or con about the pipeline’s impact on job growth and the environment, but if producers decide it won’t be profitable, it won’t be built.

The environmentalists used to say oil is a finite resource and, as supplies dwindle, the costs will have to rise. That will make alternatives like wind power much more attractive. That sounded sensible, and, for the many people who have long argued that our addiction to oil and gas is destroying the planet, so did the much discussed concept of “peak oil’’—the theoretical moment when half the world’s oil reserves had been consumed and fossil fuels began to become scarce. The date of peak oil is hard to pin down, but most suggest we passed that point a decade ago. New York Times columnist Paul Krugman said that the magic moment had arrived in 2010. High oil prices would force governments, corporations, and consumers to find another way to power the world. It was a nice dream, but it’s over now. We are awash in cheap oil. The cheaper fossil fuels become, the more challenging it will be for cleaner forms of energy—like solar and wind power—to become competitive. The drop in oil prices comes at a terrible moment. Last month the Intergovernmental Panel on Climate Change reported that our only chance to halt the rising temperature of the Earth, and to prevent the calamity that rise will cause, would be to eliminate fossil-fuel emissions by the end of the century. A plan to end U.S. fossil-fuel dependence would be an unlikely goal in any case, but, if oil remains easily accessible, it becomes politically and economically impossible. As oil-addicts, it doesn’t really matter to capitalism how much damage it causes, because we simply don’t have the power to walk away.

Nor should it be only the environmentalists panicking. The so-called "petro-socialists" of Venezuela and some African nations such as Angola who may have to devalue currency or sell off assets according to some commentators. And the deep-water wells off-shore the UK become less profitable which would have been a blow to a newly independent Scotland’s revenues.

The SOYMB blog concedes that the present oil price war there are more questions than answers as the game is played. In the end, we ain’t got a clue.  But on the other hand, unlike those green economists, we never ever claimed that capitalism can be predictable and offer the solutions to climate change. We were never ever delusional enough to believe capitalism had the answers.