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Old 01-21-2015, 09:48 AM   #26
PaulS
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Today's paper

http://www.nytimes.com/2015/01/21/bu...ll.html?ref=us

Behind Drop in Oil Prices, Washington’s Hand
JAN. 20, 2015

The New York Times
Eduardo Porter
Did the United States kill OPEC?
The plummeting price of oil since Saudi Arabia decided last fall not to cut production to counter rising supply elsewhere has fueled intense speculation about a downfall of the infamous cartel, once feared for its power to bend oil prices to its will.
Was OPEC’s biggest oil producer unwilling or just unable to stop an emerging glut? Does this mean oil will never again reach $100 a barrel — where the spendthrift governments of the Organization of the Petroleum Exporting Countries need it to be?
What’s missing from the discussion is an understanding of how the oil market got to this juncture and, notably, who brought it here.
The answer is surprising. It was the United States, mostly. Last year, the United States produced more oil than it had in 25 years, surpassing Saudi Arabia as the world’s largest producer.
Perhaps the most intriguing part of this story is that one of the main participants in this revolution is the American government.
Facing fears of a broad energy shortage, in the shadow of an embargo by Arab oil producers, the Nixon administration and Congress laid the foundation of an industrial policy that over the span of four decades developed the technologies needed to unleash American shale oil and natural gas onto world markets.

Environmentalists against any government involvement in the fossil fuels business will hate this, of course. But the collaboration between government and business in pursuit of energy independence offers a valuable lesson for policy makers forging a strategy to fit the current energy imperative: reducing carbon emissions to combat climate change.
Many have remarked that the Arab oil embargo of 1973 weakened OPEC’s hold over the oil market by encouraging non-OPEC supply — from places like Prudhoe Bay in Alaska, which came to market through a pipeline approved by Congress just weeks after the embargo. The embargo also encouraged development of nuclear energy and coal-fueled power. It prompted Congress to pass fuel economy standards.

By contrast, little has been said about the role the United States government played in developing new energy technologies. And yet for all the criticism aimed at the Obama administration’s efforts to address long-term energy challenges — and the derision over its failed investments in companies like Solyndra — the government’s most useful role might indeed be to support research and ventures that could deliver a low-carbon future.
“If there is one key lesson from the shale revolution, it is that public investments in technology innovation can bring a huge benefit for both the economy and the environment,” said Michael Shellenberger, the president of the Breakthrough Institute, an advocacy group for sustainable development, in Oakland, Calif.
The Breakthrough Institute has done the most thorough investigation I’ve seen of how three decades of government subsidies for research, demonstration and production helped bring about the revolution.
Interest in shale deposits was driven by a search for gas, not oil.
But the oil embargo gave them a big boost. Congress passed the Energy Reorganization Act of 1974, creating the Energy Research and Development Administration — which would soon become the Department of Energy.
This kick-started a period of heavy government investment in research and development to recover gas from shale. The agency provided funds for “directionally deviated” drilling, a precursor to the horizontal drilling used today. It subsidized the development of polycrystalline diamond compact bits to cut through the shale. It performed the first big hydraulic fracturing. Energy Department labs created a multi-well fracking test site.
Research at the Sandia National Laboratories into underground imaging — based on microseismic monitoring once used to detect coal mine collapses — was critical to map fractures and position wells.
George Mitchell, the shale fracking pioneer, got help from the government, including in the deployment of a horizontal well and microseismic mapping.
The government did not always get it right. In fact, research into fracking initially took a back seat to efforts to produce “synthetic fuels” from things like “oil shales” — which to date have delivered little in terms of cost-effective energy.
The government could also stand in the way. Price regulation was a significant barrier to investment into “unconventional” gas deposits until it was freed during the Reagan administration.
Of course, the government assistance would have come to nothing without private entrepreneurs who took risks and followed market signals. Fracking was mostly reserved for gas until gas prices started falling a few years ago, shifting producers’ efforts to oil, which could be exploited using similar technologies.
Yet Washington played a critical part in the story that led to oil’s recent fall.
According to Jim Hamilton, an energy economist at the University of California, San Diego, the world’s real income increased by nearly 28 percent from 2005 to 2013. To keep oil prices stable, supply would have had to increase by over 19 percent. But field production of crude increased by only 3.1 percent.
Supply was kept in check, in part, by unforeseen events: wars across the Middle East, attacks on oil infrastructure in Nigeria, sanctions on Iran. But OPEC’s big producers, like Saudi Arabia, did not increase production, either. Excepting the momentary swoon after the financial crisis of 2008, flat output from the cartel kept prices on the rise for more than a decade.
What brought the arrangement crashing down was American shale oil.
By 2013, the United States was already producing 3.5 million barrels of shale oil. Given the new American supply, high prices could simply not hold. “It was not feasible for the Saudis to defend $100 a barrel,” Professor Hamilton said. “It was a losing strategy. Fracking would have taken more of the market.”
A price of $45 a barrel does not portend a great future for American shale oil, which is comparatively expensive to produce. As investment in new shale production dwindles, oil prices are likely to recover.
But even if a bunch of shale producers are driven out of business, the industry — which can add or cut production more quickly in response to price signals — might still change oil markets for good, putting a ceiling on oil prices closer to $50 a barrel than to OPEC’s preferred $100.
“We probably won’t see $100 a barrel for a while,” said Jeff Colgan, a political scientist at American University who has studied the evolution of global oil. “Fracking does put a bit of a ceiling on the price.”
An important question is what this will do to efforts to combat climate change.
Just as the surge in natural gas from shale sharply reduced carbon emissions from the nation’s power plants, the plunge in oil prices offers a sobering reminder of the power of markets over policy.
Consider, for instance, that the White House’s middle estimate of the social cost of carbon — which measures the broad damage of putting it into the air, a starting point for debates over a carbon tax — is only about $43.39 per ton of carbon dioxide. That comes to about $18.66 per barrel of crude oil, a trivial sum compared with the significant price drop in recent weeks.
Oil’s swoon could feed directly through to bigger sport utility vehicle sales and more driving. It could blunt the political impetus to tighten fuel emissions standards.
But oil’s gyrations also offer an opportunity. “Reducing our heavy dependence on oil will require us to pay forward the huge return on our 40-year shale investments through a similarly long-term effort to accelerate the transition to fuel cell, electric or some other vehicles,” Mr. Shellenberger said.
The falling price of oil offers an opportunity for the government to raise the cash to do so.
Rock-bottom oil offers a great opportunity to increase the gasoline tax without damaging Americans’ purchasing power. Many Republicans — even those most dismissive of climate change — realize that cheap oil creates an opportunity to raise gas taxes without angering voters.
If enough such Republicans could be found (a risky bet), the swoon in oil prices could be leveraged into a boon in tax revenue that the government could use to pick some of the winners that will help solve the problem.

Last edited by PaulS; 01-21-2015 at 09:54 AM..
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