The Politics of Oil and Gas __ No. 2, “Will King Oil Be Dethroned By King Gas?”

Posted on February 7, 2013

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The discoveries of huge deposits of natural gas in deep beds of shale in the United States has spurred the search for similar deposits around the world. Many have already been found in China, India, Argentina, the Middle East, Western Asia, Israel, Greece, Poland and the United Kingdom to name a few. In a perfect world, the transition from high cost energy from oil and coal to low-cost energy from natural gas would go smoothly and the entire world would rejoice. But, this world is an asylum and the political players and special interest players will have to have their say and there will be no smooth transition; rather one fraught with conflicts.

In December of last year, Forbes published All Roads Lead to Natural Gas-Fueled Cars and Trucks. Here are a few excerpts from the article talking about the trend for  liquified natural gas (LNG) and compressed natural gas (CNG) as the fuel of the near future for trucks and cars:

The tea leaves would tend to indicate that the transportation sector will increasingly fill up using natural gas: LNG is best with heavy-duty trucks while compressed natural gas, or CNG, is used to power passenger vehicles and corporate fleets. The momentum, however, will be slow mainly because of a nascent infrastructure that would support such changes. But some high profile public and private players are working on that, and are expecting success.

“As global demand for transportation fuel increases, including LNG, Shell is well positioned to meet this demand,” says Marvin Odum, president of Shell Oil Company. “LNG will be a welcome addition to Shell’s portfolio of quality transportation fuels.”

Try to imagine a world where all electricity, all home heating, all cars and trucks operated on low-cost natural gas. Even if that kind of increased demand meant somewhat higher unit cost for natural cost, overall, everyone’s cost of living would decrease. So, even if a person’s income didn’t increase, they would still have more disposable income than before. But, this is not a perfect world and players will play.

Just seven weeks after the above Forbes article was published, Forbes published another article on LNG. It starts out with this:

Is Senate hopeful Rep. Ed Markey (D-Ma) abandoning key support for greenhouse gas reductions as political payback to Dow? Is he anti-shale gas regardless of its economic and environmental benefits?

Dow Chemical’s recent resignation from the powerful National Association of Manufacturers (NAM) in a dispute over liquid natural gas (LNG) exports underscores its expanding split over this issue with the broader businesscommunity. But in a less visible way, it also suggests the nation’s largest chemical company is retreating from its long-stated commitment to address climate change.

The LNG issue boiled over last month when the US Department of Energy released the second of its delayed and highly anticipated reports on the potential impact of relaxing restrictions on natural gas exports. This analysis, prepared by NERA Economic Consulting, concluded “the US would experience net economic benefits from increased LNG exports”—and they could be staggering. Among other key points: any potential price impacts would be in a “relatively narrow range” and exports would result in “an increase in US households’ real income and welfare,” even among vulnerable lower income families.

Why would the United States have restrictions on the export of natural gas? Why is Dow Chemical using its political clout to stop the relaxing of those import restrictions? The article doesn’t answer the first question, but it does answer the second question.

NAM, along with another powerful industry group, the American Chemistry Council, endorsed the DOE findings, even though most of its members, particularly chemical companies, could see modest natural gas price rises, a marginal cost in manufacturing processes.

The researchers estimate that increasing exports could eventually generate more than $125 billion and as many as 5 million jobs—a jolt for the US economy still trying to shake off worldwide financial doldrums.

The benefits discussed  in the first part of this post don’t occur until the transition is complete. Meanwhile, any increase in the demand for natural gas will push the price of it up and big consumers like Dow Chemical will be impacted by that higher cost.  In a free market economy, Dow would just have to suck it up along with the consumers of Dow’s products. But, the United States has not had a free market economy for a long time. A corporatist, like Dow Chemical, cares not a whit about the 5 million jobs or the $125 billion boost to the US economy.  Dow is not alone in trying to stop LNG exports. As EnergyBiz Insider reports:

America’s manufacturers are now going up against this country’s oil and gas producers. It’s a fight that bucks the whole concept of free enterprise…

So, we payers will have to sit back and wait to see which of the players has bought-off the most politicians and then the federal government, which should have no role in this issue, will make its decision.

While we are waiting for the miracle of natural gas, what about all the hype that the US would soon be independent of OPEC oil sources? In January of 2012, President Obama blocked the Keystone Pipeline project over environmental concerns in Nebraska. Now, the pipeline has been rerouted, the governor of Nebraska has signed off, and TransCanada has reapplied for permission to build the pipeline. Depending on which White House source you listen to, Obama will make his decision in March or June. It must be hard to be President Obama, who must play like a god and decide in favor of his big green Marxist constituency (Sierra Club threatens civil disobedience) or his big labor Marxist constituency. And, California Governor Jerry Brow has a similar dilemma.

The Monterey Shale formation, stretching 1,750 square miles from southern to central California, constitutes two-thirds of the country’s total estimated shale oil reserves. That’s an estimated 15.4 billion barrels, or four times as much as the Bakken Shale reserves in North Dakota, whose exploitation can now be seen from space.

But the green lobby will prove a formidable opponent to the oil and gas companies jostling for a piece of this giant pie. It is already hard at work trying to keep California’s newly recoverable energy reserves in the ground: Two powerhouse lobbies are suing the Bureau of Land Management and the Department of Conservation to prevent further exploration of the Monterey Shale and impose stricter regulations on fracking.

Let’s see. Increased jobs and taxes for a bankrupt state or save the planet? Yeah, playing god is hard work.

Well, now you know what I’m thinking. What are your thoughts?

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Previous posts on The Politics of Oil and Gas

  1. The Politics of Oil and Gas __ No. 1, “New Middle East”?
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