21st Century Wire
As the global energy game moves into the 21st century, the curtain is beginning with move back, unveiling the true nature of certain international organisations. The implications of this apocalypse should change to way we look at these institutions.
This year’s World Energy Outlook from the International Atomic Energy Agency (IEA), released in November, went further with the two policy obsessions of the IEA, described as “not very fashionable” by the IEA’s Turkish-born chief economist Fatih Birol in a November 15 interview with European Energy Review.
These “new and unfashionable” policy quests are: energy for all at an affordable price; and the struggle to prevent CO2 levels in the atmosphere exceeding 450 ppm (parts per million) by the 2035-2045 period.
The IEA quickly redefines the keyword terms: energy for all means, in particular, oil supplies for the 28 exclusively OECD member countries in the IEA: the IEA’s foundation in November 1974, after the first Oil Shock, by Richard Nixon and Henry Kissinger, laid down the IEA’s mandate of acting to ensure oil supply security for the OECD, and “affordable priced” oil.
For Nixon and Kissinger, the IEA was a second-best. Their original goal was to invade and occupy Saudi Arabia and ensure the free flow of cheap oil, Iraq-style. Their IEA was therefore set as an organization able to confront the Arab oil exporters using guile rather than force, by playing one exporter off against another with a range of different contract types, building up stocks of oil in the OECD countries, and forcing down oil prices.
This has nothing to do with the IEA’s new struggle against global warming – assuming, for starters, that global warming really exists, and is due to human emissions of CO2 from burning fossil fuels – especially coal, not oil. This new obsession of the IEA has however grown to become its single most important policy theme for advising energy ministries and government deciders in the OECD. And “fighting climate change”, according to the IEA is vital and obligatory.
The struggle needs higher energy prices, carbon taxes, emissions trading, carbon offsets and everything we now associate with “carbon finance”. The IEA’s goal for a “sustainable energy future”, and its related goal of “an efficient energy world” by about 2035 are costed by observers (and by the IEA itself) as anywhere up to $45 – $50 trillion in dollars of 2012 value.
Paying for that needs high-priced energy. The IEA is therefore a “price hawk” for oil. This year’s WEO repeats the IEA’s scenario forecast that by 2017 year average oil prices could attain $175 per barrel. We can change the “could” to “should” after reading this year’s WEO.
BACK TO GLOBAL WARMING
Incredible as it can seem to many, freshly re-elected Barack Obama is giving serious thought and attention to banning, or limiting – or taxing – oil and gas extraction by hydraulic fracturing. One part of Obama’s rationale for this is the “possible GHG (green house gas) release from fracking”. Another is a lot more down to earth. Passing a new energy tax, called a carbon tax, in the USA could garner $100 billion in tax revenues for the Federal government in its first year of operation. Cross party support to a carbon tax is growing rapidly in Congress. The extreme low price of gas in the US, due to fracking, provides an easy tax base for adding a new Federal tax and new State taxes.
In the US and soon worldwide, “fracking” has had and will have revolutionary effects on gas supply and gas prices. The drilling process has brought U.S. energy independence within reach – with the important rider that for now rapidly growing shale oil production, this needs $100 a barrel prices.
Some US oil and gas industry leaders remain enthusiastic but cautious that fracking will be fully endorsed by newly re-elected President Obama and by the majority of US state leaders, but this apparent full or majority industry support is belied by the damage to US energy corporation fortunes already produced by “overcheap” natural gas. There is almost no prospect of natural gas prices, in the US, even attaining one-half of gas prices in Europe and Asia. Gas industry hopes, at present, are that the US will have a cold winter, following a hot summer, and this may boost gas prices to around $5 per million BTU, about one-third of European and Asian prices, which prices gas energy in the US at $29 per barrel of oil equivalent. Oil prices still hover around $110 per barrel for Brent.
Open endorsement of fracking from Mr. Obama and state leaders would make fracking the cornerstone of US energy policy for decades to come. Conversely, if for any reason Obama distances himself from fracking, takes a more cautious and pro-environmental line, argues that fracking has a high climate change impact, and is a “disruptive technology” we may expect major changes – in particular a rise of gas prices in the US. The energy price factor is critical, and for Obama the subject of US natural gas has two tax-grubbing opportunity windows: either tax fracking, that is gas production; or tax gas with a carbon tax “to save the climate”, that is gas consumption. The huge difference between oil prices, on one hand, and gas prices on the other show the size of the tax-raising opportunity in the US.
The economic case for fracking is massive. This year’s WEO report however takes a studiedly neutral line on fracking, which reflects the huge range of opinions, in energy ministries of the OECD countries on this subject. US energy sector leaders, and their political friends in both main parties, have now eased off on the “energy independence” claim for fracking. They are now, more than ever, portraying domestic oil and gas production as a key way of generating tax revenues, spurring job creation in “repatriated industries”, cutting the trade deficit and saving the nation from going off the “fiscal cliff.”
The IEA faithfully reflects this emerging realworld consensus of the political elites. World energy prices should be moved up, not down, “to save the planet”, or at least increase state tax revenues and fight the burden of sovereign debt. Keeping oil prices high, worldwide, and keeping gas prices high, outside the US, are easily made conclusions on the IEA’s main policy advise, from this year’s WEO.
WHY HIGH PRICES: THE INDUSTRY ANGLE
The extreme difference between the case for US shale oil production, by fracking, and natural gas production, by fracking, is very simple to explain. US shale oil producers need high oil prices to “keep on frackin”, and claim to believe that oil prices “will not significantly decline” from curent levels around $100 a barrel. Conversely, US gas prices are the lowest since 1992 and set to stay that way. Gas fracking, in the US, has been too successful. Whatever US gas producers, like Chesapeake Corp or Exxon’s gas subsidiary XTO Energy want, it is not cheap gas.
Fiscal cliff reasoning is that tax reform, to be sure, is vital but the US cannot tax its way out of the crisis. Also, there is no way that savings can rise, the US cannot save its way off the cliff. Chasing growth is fine, but the US cannot rapidly grow its way out of the crisis. The alternate and providential way to make recovery feasible, is domestic energy. As the CEO of the US Chamber of Commerce, Karen A. Harbert, has said: “Every dollar that we generate from energy is a dollar that we don’t have to take out of the Defense Department, the entitlement area, or increase taxes, or send overseas.”
Official optimism that Obama and the White House will recognize that remains high. While many Republicans and some energy industry leaders have doubted his sincerity, Mr. Obama’s campaign voiced strong support for expanded oil and gas drilling throughout his race against Mitt Romney.
The US will overtake Saudia Arabia as the world’s top oil producing country.
The IEA has played its own role by recently predicting that the US will become the world’s largest oil producer by about 2020, overtaking Saudi Arabia and putting the nation on course to be energy self-sufficient by 2030. Due to fracking, US natural gas output has risen by about 25% since 2007, removing any possible outlook of scarcity. Shale oil could or might do the same thing – but only if oil prices stay high.
This new energy reality puts pressure on the Obama administration to fully embrace fracking and avoid taking steps that could hamper it, many analysts conclude. Maintaining high and rising gas output, and bargain basement US gas prices, creates a huge tax window of opportunity. For oil, the situation is a lot more complex, but the goal of increasing US shale oil output sorely needs high-priced oil. Despite some major States – specially New York and California – remaining equivocal on allowing fracking, state level support to fracking has certainly continued to grow.
SQUARING THE CIRCLE
The probable or possible solution, for Obama and for other OECD country leaderships facing the same dilemma, is already on offer from the IEA, in this year’s WEO.
The IEA’s prediction the US can overtake Saudi Arabia by its oil production, due to shale oil, makes little reference to the oil price background for this forecast. The IEA’s commitment to a high-priced oil future is however clear – very few IEA scenarios give an outlook of oil prices declining below about $75 a barrel. Many IEA forecasts paint a picture of year average oil prices hitting as much as $175 a barrel by 2017. This uear’s WEO repeats the IEA forecast of a year average $215 per barrel by 2030. The IEA may be studiedly neutral on fracking, but its oil price outlook is high, very high.
Almost never given coverage in IEA reports and studies, high oil prices are now treated by the IEA as a major long-term – in fact permanent – part of the global energy scene. For national administrations like Obama’s, high oil prices and high turnover and profits for oil producing companies and corporations also have a simple bottom line: high taxation revenue potentials. The European example – several times cited by Steven Chu early on in his job as US Energy secretary – is that car drivers can be forced to pay $8.50 – $9 per US gallon for their fuel (around $378 per barrel), of which as much as 65% goes to the State as oil taxes. The high profits garnered by European oil companies on their home turfs, also generate large State tax revenues, despite the corporate tax hedging and evasion.
To be sure, “high gas(oline) prices” in the US are a politically sensitive subject, as Chu quickly realised, but little by little, US motorists are learning to think in small litres, not big gallons, and pay more for their fuel. Obama’s renewed “personal conviction” that the world faces a crisis of anthropogenic global warming, the recent hot summer, and hurricane Sandy, both in the US, all play strong supporting roles in the elite quest to raise energy prices – and taxes.
The bad example of fracking – slaying US natural gas prices and making major gas companies unable to pay taxes, or even stay in business – can be prevented from “migrating” to oil and killing the Golden Goose of high oil prices. For this to happen, Obama has to act to prevent oil prices eroding too far. Taxing shale oil fracking “to save the planet” is a certainly possible candidate, for his administration’s fiscal cliff-oriented endorsement of fracking and higher gas prices in the US would make the stark, even ridiculous difference between oil prices, and gas prices, less massive.
The IEA certainly hopes so and stolidly continues to forecast high oil prices.