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Energy Policy Freeze Frame In 1970s Mould

Politics / Energy Resources Jan 18, 2014 - 09:52 AM GMT

By: Andrew_McKillop


Oil Fear

In a January 15, 2014 editorial titled 'Energy Antiquities' the Houston Chronicle  underlined that when it concerns energy – we primarily mean oil – the thing to remember for the ever-expanding cohort of persons too young to remember the 1970s was that this decade, in a word, was the Forgettable Decade. Very forgettable.

After the 1973 shock rise of oil prices decided not only by the Arab producers but also by non-Arab Iran and the international oil majors, the rest of the decade was marked by fuel station line-ups and continuous price hikes in several major oil importer countries, which only got worse in 1979-81 following the Islamic revolution in Iran. For many, this was a period of humiliation at and by the gasoline pump. While the Beatles were happy in the late 1960s wearing collarless Nehru jackets, by the late 1970s these were no longer a joke, when worn by Arab and Iranian oil barons dictating always higher oil prices. The al-Qaeda linkage and equation oil = terror was to come, later on.

The Houston Chronicle asks why is it that so much of US and other western countries' energy policy, today in the 21st century is stuck in a 1970s mold with policies, programs and laws that are as antiquated as a 45rpm plastic disc from the Beatles era?

No Change

Antiquated, for some, means traditional. And the tradition of oil shortage, today in 2014, helps Goldman Sachs and other rightly-named “market operators and players” keep oil prices near or above $100 a barrel – while a barrel equivalent of coal energy, or gas energy in the US (but not Europe or Asia) languishes at far below $30.

This is transparent global energy market pricing, you said?

For Texans addressed by the Houston Chronicle the subject is numbing and unreal. Why the US should have a 1970s-model energy policy, today, 40 years later, is especially ridiculous for an oil and gas-producing region of the US that  has reversed years of domestic production decline. To be sure, local producers gain from the absurd “global risk premium” on oil, but certainly not gas in the US, while both industries suffer from antiquated and fear-based policy and legislation, coupled with Washington's gut-level instinct to tax anything that moves. 

Houston Chronicle calls this the Pac-Man 1970s fear syndrome that can drag down growth in Texan energy output.

Logically, it says, needed reform must begin with a loosening of shortage-inspired, 1970s-era export and transport regulations that hinder the energy industry's, and the nation's ability to deal with gluts of light crude oil that are very logically expected to build, as well as the enormous increases of natural gas production from shale rock. The cast-in-concrete shortage-driven, fear-laden 1970s energy policy set, which still exists today, rejected any possibility that US energy production would increase. In fact the shale revolution stretching from Texas across the nation to Pennsylvania and Ohio, and to North Dakota and the upper Midwest expanded domestic oil and gas production beyond the imagination. In the relative blink of an eye.

Unexpected for sure – but was it unwanted, also?

In 2013, the US overtook Russia as the world's leading producer of combined oil and gas fossil fuels. Next to Russia and Saudi Arabia, the US is now third-largest oil producer in the world.

Yet the US domestic oil and gas industry remains handcuffed by outmoded federal regulations that prevent potential new international markets for U.S. Energy producers from operating efficiently, intensified by more than 10 years of rapid growth in US oil refining capacity, and therefore export capability. Industry data shows that the stamp of 1970s oil shortage fears dictated a massive ramp of heavy crude refining capacity along the US Gulf – for example to draw in  Venezuelan heavy crudes. The refining industry retooled for heavy crudes, and ignored the explosion of domestic light oil production until too late. It now faces a massive restructuring challenge, with likely domestic shortages of key fuels on a recurring basis, unless oil trade regulations are eased.

Markets That Don't Exist

Due to dirt line left in the bath by 1970s energy policy, the US oil refining industry made a response to crude oil supply and market conditions that disappeared years ago. The same happened in Europe, intensified by governmental energy policies even more crisis-oriented and shortage-based than US oil fear. In Europe, from the early 1980s and reinforced by the European Commission's Energy directorate for at least 15 years, the one-liner was that the continent's refiners must adapt to cheaper heavy crudes – but  produce enough gasoline for European's then gasoline-majority car fleets.

Today, several EU28 countries like France and Germany have 75% diesel car fleets, and the discount on heavy crudes against light crudes has shrunk to almost nothing.

Ignoring real markets, and imagining fantasy market conditions is, to be sure, a privilege for bureaucrats and politicians but at some stage a reset to reality is obligatory. For the US, its light shale oil production is growing quite fast, but its shale gas output and potential output growth is set in another and even higher league. Downstream of the gas boom, a host of US and international major petrochemical manufacturing companies now call Houston home but unreal pricing for natural gas inside the US – too low – and worldwide – too high – can only continue for so long. As one simple example, petrochemical production of synthetic light oil products direct from natural gas feedstock is not only technically possible but depending on corporate commitment, the gas-to-oil route producing marketable final use oil products is viable. Even at oil price levels around $60 per barrel and at current US natural gas prices, substituting crude oil with gas is economically feasible – but expensive in first investment terms and exposed to massive policy risk.

The 1970s Curse

In the US, this energy debate is running today, because a much simpler, lower risk route to value-added is the export of US shale gas as LNG, and import of crudes suited to US Gulf refining. For the Houston Chronicle, the best solution is to change legislation hampering or forbidding access to export markets for both oil and natural gas. At one and the same time, this can restore and maintain market equilibrium for each product, while avoiding both a glut for sweet crude, and a depressed domestic gas market that discourages increased natural gas production.

This won't happen easily. Neither in the US, and even less so in Europe, will energy policy makers give up their 1970s mantra of oil shortage. Checking Nymex or ICE oil market prices, they are comforted that Goldman Sachs and the oil market maker banks plug along with a “nice price” of $100 a barrel, and ignore the fact this market rigging is totally disconnected from global supply-demand realities. Old worries die hard among the political class in Washington or Brussels, and the bankster-broker “community” laughs all the way to the Cayman Islands.

In the US, a large political lobby militates for “keeping energy resources at home”, not sent to China, India or Europe. To be sure, this certainly does not include American coal, an industry condemned to oblivion inside the US, because of shale gas and oil, and climate-environment legislation. US coal is now dependent as never before on export markets. However, due to 1970s vintage hysteria on oil shortage, and a diluted version of this hysteria for natural gas, Washington sets the hurdles very high for oil and gas exporting because these are “strategic and limited” resources.

Ironically, as the Houston Chronicle notes in its editorial, the anti-export lobby in the US puts its political advocates in the same bag as the often-demonized Koch brothers, whose main interest is keeping US gas prices ultra-low, with its directly related menace of aborting continued growth of shale gas output. European oil fear, unchanged since the 1970s, dictates a politically forced and chaotic, almost anarchic rush to develop renewable energy, only for electricity generating – which will save almost no oil at all!

These are high-level political issues due to their economic weight and the ingrained, insanely stubborn policy that there is “imminent shortage” of oil, a perpetual oil crisis. Only deciders at presidential and prime minister level can change the gameplan and reset the energy playing field to flat. The Houston Chronicle was at best dubious this can happen in the US of Obama, who likely does not share the paper's view that when it comes to energy policy, the 1970s are not just a quaint picture of yesterday – but are prehistoric.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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