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The One All-Encompassing Truth Behind Energy Policy

Commodities / Energy Resources Feb 07, 2014 - 06:52 AM GMT

By: Money_Morning


Dr. Kent Moors writes: Most people think the “big” energy decisions are driven by what it costs at the pump or how much it takes to heat their homes (a lot, as it turns out this winter).

But as the controversial decision over the Keystone XL pipeline shows, there’s another element in play… and it’s a big one.

In fact, it’s the most important factor you need to understand if you want to know where the energy market is headed.

It’s the “policy factor.”

Of course, we talk about what policy makers are likely to do or not do all the time. Often it’s not long before it morphs into a diatribe about politics. That is not what I am talking about here.

That’s because there is a very important missing ingredient in these discussions, and it leads to a fundamental misunderstanding about how policy really works.

But if you strip away all of the partisan bickering… ideological posturing… and nationalistic rhetoric…

One all-encompassing truth emerges…

It’s About More Than the Cost of a Fill-Up

You see, energy policy is fundamentally about one thing: Merging domestic needs with international products and finance flows – not the price of a gallon of gasoline.

Yet, it is not unusual to hear the price of gas used as an argument for keeping our shale largess here at home, discounting exports in favor of keeping local stockpiles, and a range of other “America first” solutions that only seem to look toward the next election.

And we’re not the only ones who sometimes think this way.

For generations, this type of thinking resulted in Mexico’s national oil corporation PEMEX being off limits to outside investment, and Moscow’s legislators to limit control of larger fields to only Russian companies.

It has also caused the rejection of Chinese interests owning American oil companies, and the refusal of Saudis (and others) to provide reserve figures on the grounds of national security. And there are many other examples.

Of course, by now everybody knows energy is a global matter. Nonetheless, energy is usually only addressed as if it were relevant only to the location of the end user. This not only distorts the process, it also fundamentally prevents genuine policy making.

Now I am not suggesting some sort of altruism that sacrifices the national interest on the altar of international convenience.

Policy making will always remain self-centered. No national policymaker in his or her own right mind would give up a national advantage for some other country’s benefit.

As I have frequently noted, the exchange among nations is essentially self-serving in motivation, survivalist in intent, and takes place within a global system lacking any centralized power to restrain the action of individual states.

Prevention is largely one nation pressuring another. Actions, therefore, are offset only by the contrary motives of other nations.

In other words, the individual state still remains the central actor. When that action has an international economic impact, the essential motive is to achieve some cross-border advantage for a domestic economic or market reason.

This is not to say that nations are always callous, only that they are always inward looking.

The term “state-centered realism” was coined years ago by Robert Gilpin to explain this. I think it fits nicely in this case.

Even when common ground can be found among separate countries, this realism still pervades in the negotiations. I once suggested during an international meeting that treaties are agreements objectively arrived at but only subjectively followed.

The best “win-win” situation will only survive if the participants have a national reason for adhering to it.

That’s why I decided to become the Executive Chair of the Global Energy Symposium. I have mentioned this association before, and you will hear much more about it as we approach the first GES international conference later this year.

Yes, it is true. The primary focus of energy policy makers is national. Worldwide implications arising from energy issues are viewed through nationalistic prisms. That is simply the way it is, especially when officials are dependent upon a local electorate to continue in office.

Energy Policy Has Now Gone Global

But the playing field is global. The effects of policy hardly end at the border or the shoreline. The international energy market is a very integrated.

A decision made in one place will have consequences somewhere else. Even in a “Fortress America,” where the results are not considered beyond those of a domestic variety.

But as the U.S. approaches what is effectively energy self-sufficiency, events elsewhere will still have an impact on domestic pricing even if we are no longer importing oil from nations other than Canada.

As we import less crude oil, we are exporting more processed finished oil products. In addition, the U.S. will also begin exporting crude as the pressure of large unconventional tight oil (shale being a part) begins to throw the national pricing system off-balance.

No nation is immune to these forces -from heavy net oil and gas exporters like Saudi Arabia (oil) and Qatar (natural gas), soon to be joined by the U.S. in both categories once the liquefied natural gas (LNG) boom kicks in, to heavy net importers such as Japan or India.

And that means the global component of energy policy implications is fast becoming the primary overarching consideration in where the markets are headed.

This also means both working capital commitments and individual retail investors will find balance sheets are now influenced – and in some cases determined – by what is happening someplace else.

Of course, it used to be such matters were reserved for geopolitical conversations. What would happen to oil prices if Iran closed the St rait of Hormuz, for example, or what does the latest spat between Russia and Ukraine mean for natural gas prices in Europe? The international component was always seen as some interruption or exception to what was a largely a domestic investment calculation.

Not anymore.

From the price to fill the family SUV to the return on a factory just down the street, global energy policy will increasingly determine the cost or profit of virtually every local energy-related transaction.

That means all of us are in for one fascinating ride as this continues to develop.

Source :

Money Morning/The Money Map Report

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