Archive for the ‘Oil’ category

How Much of a Benefit is Low Oil Prices?

March 7, 2016

Low oil prices have provided an economic windfall to households in New Hampshire and across the nation. Based on actual 2014 energy consumption and expenditure data for NH, changes in 2015 energy prices, and forecasts of 2015 energy consumption (actual data won’t be released for another year), I estimate that businesses and households saved about $1 billion in 2015 as a result of lower oil prices (Figure 1).

NH savings

Households saved over $800 million – largely as a result of lower gasoline prices – and businesses saved nearly $200 million. In 2015 households in NH spent about $665 million less on gasoline than they did in 2014 and about $800 million less than they did in 2012 (Figure 2).
gasoline savings

Here I am talking about the monetary impacts of lower oil prices, the distribution of impacts among states, between business and households, by different income levels, and how increased U.S. oil production is changing the demand for imported oil. While the overall impact is a net positive on the U.S. economy – especially consumers – the net benefits to our nation’s economy have been smaller than many anticipated. This is not a full accounting, I do not consider any environmental implications (I will write about some of those in future posts on carbon emissions, carbon taxes and climate change that are sure to incite the unstable) or the fact that low oil prices make Vladimir Putin only slightly more scary or any number of petroleum states that much less stable.

There was a time not long ago when low oil prices would have provided a stronger stimulus to the U.S. economy, as every dollar saved by businesses and individuals as a result of lower oil prices translated into nearly a dollar of benefits to the U.S. economy as more of the dollars saved were dollars not being sent overseas. But today many more of the petro dollars saved are dollars that would have gone to U.S. businesses and workers, reducing the overall net benefits that lower oil prices have on the U.S. economy. Figure 3 shows the dramatic increase in U.S. oil production beginning late in the last decade along with a concomitant decline in oil imports.
production and imports

Regional Impacts

Make no mistake, lower oil prices are a good thing for U.S. economy overall, but the boom in oil and gas production in the U.S. includes states that are relatively new to energy production, spreading the negative impacts of a downturn in energy markets more broadly across the U.S., as well as some states who have gone from very small to more significant energy producers, deepening the negative impacts from low prices in those states. Texas, Oklahoma, Alaska, Louisiana are used to economic disruptions caused by fluctuations in oil prices (although much of Texas is now much more diverse) , North Dakota and other states not so much. Figure 4 shows the volume of oil production in 2014 by state and thus the relative exposure that these state have to fluctuations in oil prices.

state production

The increase in U.S. oil production was spurred by high world oil prices that made it economically viable to extract oil using more costly methods, as well as improved technologies that made it possible to extract oil that could not be obtained through traditional drilling techniques. A few years ago I worked on an energy project in the Permian Basin of West Texas and Eastern New Mexico that involved enhanced oil recovery (EOR) techniques. At that time the price of oil was around $100 bbl while the break-even price of EOR was approximately $67 bbl. In that environment it is not surprising that a boom in production would occur in areas with even difficult to extract oil reserves. Continued improvements in technology have no doubt lowered the break-even price of EOR below the $67 that it was back in 2012, but probably not as low as the $48 per bbl that was the average price for U.S. crude in 2015, and certainly not as low as the $32 bbl average of January 2016. The sharp decline in oil prices since 2014 is affecting the profitability, production, and employment of energy companies and those that service and supply them. Low oil and gas prices don’t help energy producing states the way they help NH and other non-energy producing states because the benefits of lower oil and gas prices to households and businesses are mitigated by the reduction in investment and employment in oil and gas extraction, transportation, and the industries that support them – including financial industries, professional and technical industries (engineering etc.) and many others. Figure 5 shows states at the bottom of private sector job growth in 2015 – all but Vermont and Illinois are significant energy producing states.
state emp  change

Income Support

The benefits of lower energy prices on households nationally have been large. Energy spending dropped from 6.1% of total expenditures of households in 2008 to 4.4% through mid-2015. All households benefit from lower energy prices but the benefits are not evenly distributed. Low-income consumers devote a larger share of their budgets to energy and thus lower energy prices provide a greater relative benefit to households lower on the income scale. Data from the Consumer Expenditure Survey of the U.S. Bureau of Labor Statistics show that consumers in the bottom half of the income distribution devoted 10.7% of their budget to energy expenses, while consumers in the top half of the distribution devoted 8.1% of their budgets to energy (the figures are higher in the Northeast where households spends more on heating and much more on oil heat than the national average). To some extent these differences may overstate the benefits of lower energy prices to lower-income households because the largest difference in the percentage of household expenditures on energy by income level is for electricity; lower oil prices have had little impact on electricity prices, but the benefits to lower income households are still signficant. Figure 6 shows the percentage of total household expenditures in the U.S. that are devoted to energy among households in four different income ranges.

exp by income level

Geopolitics

The most important implication of U.S. oil production may be for U.S. foreign policy. Not only are oil imports on the decline as U.S. production has increased, but the sources of imported oil are also changing. Persian Gulf states are a declining source of oil imported in the U.S., while Canada is a rapidly increasing source (Figure 7).

imports by region

The historical role that concerns about oil supplies have played in U.S. policies toward Persian Gulf states is debatable but a declining dependence on Persian Gulf oil at least offers the possibility that whatever U.S. involvement continues in the region will be less energy dependent. If current trends in U.S. production and imports continue, it is possible that the only country that the U.S. imports oil from in 10 years is Canada. If I have learned one thing from this presidential primary season it is that not all Canadian imports are a good thing. But, I grew up along the Canadian border and I would be pretty comfortable only relying on the great white north to meet our nation’s demand for imported oil.

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The Stone Age Didn’t End Because of a Shortage of Stones

January 24, 2013

The operator of the New England power grid (ISO New England) issued a media release yesterday noting that because of the decline in natural gas prices, overall, wholesale electricity prices in the region dropped in 2012.  Reader”s” (if there is more than one) of this blog know I write a lot about energy issues and have noted the trends and benefits of natural gas to energy prices in the region (here, here, here, and here as well as in posts about other energy issues).

Increased U.S. production of natural gas has resulted in price declines and price declines are resulting in more fuel switching that will put more pressure on the price of natural gas unless production increases faster than increased demand.  U.S. production of  natural gas is likely to continue to increase faster than other fossil fuels (see chart below), but increased fuel switching will put more pressure on natural gas prices.

US fossil fuel production

One problem for New England is that our infrastructure for delivering natural gas to the region is the weakest of any region of the country and one result is that unless or until that changes, we won’t benefit as much as other regions from increased production.  The chart below shows a forecast of real, inflation adjusted fossil fuel prices to 2040.  Nationally, natural gas prices will rise faster than coal, but more slowly than oil.  The natural gas price trends here are for prices at Louisiana’s  Henry Hub distribution point (the reference price for natural gas prices), New England prices are higher but the question is, how much faster or slower will they grow in New England?  Improved infrastructure would help.

US fossil fuel prices

Coal is abundant and prices will grow relatively more slowly, but the economics of coal as an energy source still don’t give it an advantage over gas.  Over the next 3-5 years over 200 coal-fired electric generating plants will be retired according to a coal trade group.  They blame environmental regulations but there is more to it than that.  Besides the greatly narrowed gap in fuel costs between natural gas and coal, the fact is most people don’t want coal used, or have it used near them.  The cost of burning coal more cleanly is relatively high (it’s not just regulators that impose those costs, it’s the only way a majority of the public will support coal and if it costs too much they wont support it as long as there are more competitively priced alternatives – as there are now). Finally the cost of constructing a coal plant, compared to combined-cycle natural gas power plants is much higher (even without the new equipment required to reduce emissions) and they take longer to build 4-5 years compared to 2-3 years for natural gas, making financing of such projects more difficult.

I am not a coal hater.  Although I have worked on many more combined-cycle natural gas electric generating plants, I have also worked on two or three electric generating projects that burn coal, most recently one involving super-critical clean coal technologies and carbon capturing,  but phasing out older, less efficient, coal-fired plants makes perfect sense and can be done over time without jeopardizing the reliability of the grid if new natural-gas fired plants are built.  Relying just on natural gas doesn’t solve our  CO2 problem but it helps (ok deniers, let loose – I am a believer that CO2 is a problem that needs to be addressed).

The point of this post (by now you are probably asking if there is one) is that fossil fuels are not going away anytime soon.  Not too long ago there were apocalyptic predictions about the availability of fossil fuels in the future.  Those predictions aren’t proving accurate but at some point fossil fuels will run out.  Not in my lifetime, which is a good thing for my business as long as I still can get hired to work on natural gas or (gasp) coal-fired electric generating projects.   But more abundant fossil fuel doesn’t (or shouldn’t) lessen environmental concerns over its usage.  The stone age didn’t end because of a shortage of stones and the fossil fuel age shouldn’t wait to end until we run out of it.  Somebody will have to pay for developing new technology that ends the fossil fuel age.  Unless we start now,  the cost of the U.S. debt that we pass down to future generations will look small compared to the costs of developing new energy technologies that we will be passing down in the face of genuine declines in fossil fuels.  It is not just a matter of  increasing renewable energy,  although that will help.  Solar and wind and even hydro generation suffer from over/under demand issues.  Balancing power output to need is extremely problematic once you try to get renewable power above 20% of total generation, new technologies need to be developed.

The stone age was replaced because newer and better technologies were developed despite an abundance of stones, lets hope the same is true for the fossil fuel age.

Renewable Energy in the Era of Rising U.S. Oil and Gas Production

November 7, 2012

Dramatic increases in natural gas and oil production in the U.S. have increased the nation’s prospects for energy independence.  Increases in oil and gas production are good news for the U.S. economy and consumers, but one unfortunate result could be reduced efforts to increase the nation’s production of energy from renewable sources.   High oil and gas prices, as painful and harmful economically as they are,  spur development of renewable sources of energy.  I couldn’t be more enthusiastic about the positive implications of increased domestic oil and gas production but my enthusiasm is tempered by the prospect of a stalling emphasis on developing  renewable energy sources.   Northern New England states are above the U.S. average for electricity generated by renewables, with Maine being a national leader at 56% of it electricity generation.  Vermont is at 25% and NH 14% (each of these states generates a large percentage of electricity from nuclear fuel while Maine does not).

Southern New England states lag in electricity generated from renewable sources of energy, and as the chart below shows, have a long way to go in meeting their goals for the percent of electricity generated by renewable resources – even when the goals are modest.

The Disconnect Between the Cost of Generating Electricity and Retail Prices

October 24, 2012

It is hard for consumers of electricity to understand why retail prices are what they are and how they are determined.  It is beyond one blog entry to fully describe the process but in overview, the suppliers  of electricity (generating companies) in a region offer to supply electricity to the market at a given price and the offers are accepted beginning with the lowest cost providers first, until enough energy is supplied to meet expected demand in the region.  The price of electricity offered by the last electricity generator needed to meet the regional demand determines the market price paid by companies that supply the electricity to businesses and consumers.  Retail prices are a function of the market price of electricity, plus many other costs such as transmission, special infrastructure charges, and profits by suppliers, among others.  Much of these costs are determined at the state level by regulators, as well as the characteristics of the retail electricity market in the state (competition) and the practices and policies of the companies that supply electricity to retail markets.

The end result is that retail prices for electricity in any state bear only a limited relationship to the cost of generating electricity in the state.  The chart bellow shows that the cost to generate 1 million BTUs of electricity in New Hampshire is about in the middle of all 50 states.  Vermont is also relatively low.  Both states have a relatively lower generating cost per million BTUs because a significant portion of the electricity produced in their state is from nuclear generators.

The correlation between the fuel costs to generate electricity in a state and retail prices per 1 million BTUs is modest, explaining less than one-third of the price per million BTU at the retail level.  The chart below show that despite fuel costs that are in the middle of the pack,  NH, VT and CT have high retail prices per million BTU of electricity.   The regional nature of electricity markets along with the policies of state governments and the actions of individual retail sellers of electricity all play a role in disconnect between costs for generating electricity  and prices at the retail level.  We don’t have much control over the  supplies of electricity beyond our state but we do have some control over the mix of suppliers of electricity which determine the cost of fuel for generation and we have a lot of control of the structure of retail markets and many other factors that determine the non-generating costs of electricity in the state and ultimately prices at the retail level.

What’s the Breaking Point for Oil Prices in Northern NE?

October 17, 2012

Because the Northeast is the one region of the country where a high percentage of households heat with oil, high oil prices can take a particularly heavy  toll on household budgets in the region.  Not all states in the region are similarly affected however.  Maine get hits hard because of its weather, the fact that its industrial mix is more energy dependent than say NH , MA, or CT, and even VT.  Plus their extensive tourism industry gets hurt when gas prices rise.  In NH, a lot of economic activity also depends on travel to the state which is hampered by high gasoline prices, and overall, NH has a relatively high rate of non-discretionary driving (that is we have a bit longer average commutes and a higher percentage of commuters traveling further) that hurts budgets when gas prices rise but our industrial base uses less energy per dollar of GDP than most states (MA and CT are lower in NE).  I’ve done some econometric modeling to see how sensitive employment changes are in New England to changes in the price of oil and gasoline.  All states are affected by higher oil and gasoline and all energy prices but the MA economy is somewhat less sensitive (the elasticity of employment with respect to oil prices is lower) than any of the  Northern New England states.  In Northern NE, NH is the least sensitive to oil prices but as the chart below shows, even at current oil prices, or at the average price during all of 2012 (about $96), employment in NH is 2,000-3,000 lower than it would have been if oil prices had remained at 2010 levels.

Higher oil prices act like a tax increase on the consumer, reducing disposable income and resulting in a shift in  purchases away from some goods and services to pay for higher energy costs.  In addition, high energy prices (especially gasoline prices) have a tremendous negative psychological impact on household and consumers confidence and sense of economic well being.  How much is too much of an increase in oil prices in Northern NE?  At what point do higher oil prices (which largely determines gas prices) tip the region into recession?  Based on the same models used above, the point at which slower job gains or actual job losses would occur is probably at a sustained price (for months on end) of at least $130 to $135 bbl.  But that changes depending on economic conditions and is also a function of the energy intensity of each state.   Strong economies can take more shocks without falling into recession.  In a weak economy it takes a smaller oil price increase to induce recession.  In NH, the breaking point price is now probably closer to $125 – $130 bbl, and in Maine a bit lower, while in Massachusetts, the price that would induce recession is probably closer to $140.

Burn More Gas to Burn Fewer Dollars

October 15, 2012

The National Oceanic and Atmospheric Administration is forecasting over 20 percent more heating degree days for East of the Rockies and depending on your fuel, heating costs could be up by as much as 19%  over last year (if you heat with oil).  That’s bad news for the almost 50% of NH households that heat with oil  (compared to just 6% nationally).

The growing disparity between oil and natural gas prices during the past decade ( graph above) has led to greater use of natural gas in the commercial, industrial, and electric industries in NH and elsewhere,  but NH still lags in natural gas usage as a percentage of all energy use in the state.

That is unfortunate because later this decade growth in domestic supply of natural gas (led by dramatic increases in the supply of shale gas) is forecast by the U.S. Energy Information Agency to outstrip growth in demand.  Prices, although expected to rise gradually, are still forecast to be lower in 2035 than they were in 2005.

Stable natural gas prices should make investment in natural gas conversions more attractive to NH  households. Lending programs by NH banks and credit unions, directed at energy efficiency,  could facilitate that.  But it is in transportation that conversion to natural gas could have the biggest impact on NH’s and the nation’s energy expenditures and our need for oil imports.  The last time I checked, however,  there were no dealerships in NH offering the one natural gas powered passenger vehicle produced by major auto manufacturers, there are less than a dozen natural gas “filling stations” in the state, and there are no rules and regulations in place for homeowners to make use of the natural gas lines to their homes by installing already commercially available residential natural gas auto refilling equipment.


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