THE NEXT OIL BOOM
A global battle for a share of Asia's future energy demand is on, and Middle East suppliers may win it. Both the United States and Asia would benefit, however, if American companies won a greater presence in the region.
American companies could gain a strong share of Asia's future demand if they could compete aggressively against Middle Eastern producers. They will earn this right only by focusing on the right to export and by not fighting carbon-reduction measures at home.
Leveraging the current American energy boom by allowing unfettered oil and liquefied natural gas exports — which are highly restricted as a result of now-obsolete energy policies — would demonstrate the United States' global leadership, create more competitive markets and reduce Asia's dependence on coal by making natural gas more affordable.
The reality in the United States, however, is that any opening of exports must be balanced with progress on the environment. Regrettably, America's leading energy companies are more focused on fighting domestic efforts to reduce carbon emissions than on gaining the freedom to compete abroad.
That misplaced fight, based on ideology or efforts to eke out a modest increment of declining American energy demand, undermines the future of the American industry and delays important national security benefits.
At the summit meeting of the Organization of the Petroleum Exporting Countries in Vienna last November, Saudi Arabia officially went ahead with its stated intention to abandon the role of swing producer. This is part of a long-term strategy to delay high-cost oil investment, undercut investment in Iraq and Iran, cool the United States' shale boom until demand recovers, and build out Saudi refining and petrochemical capacity while oil prices are low.
Thus the seeds of the next oil boom are already being sown. Saudi Arabia's policy has resulted in about $220 billion worth of investment cuts worldwide, much of which is a result of project deferrals, including deepwater projects off West Africa and in the Gulf of Mexico.
The last Gulf of Mexico auction was a historic disappointment. Mexico, Brazil and Iraq are all discussing how to adapt to more competitive fiscal or legal frameworks, but internal politics have allowed only marginal improvements. Asia's strategic partners are increasingly Middle Eastern suppliers, which collectively hold around 55 percent of regional market share.
When demand recovers, as it did in 2003 and 2011 largely because of revived economic growth in developing parts of Asia, or if supply disruptions resulting from unrest in other Middle East countries limit access to energy supplies and drive up prices, Saudi Arabia and the other Arab OPEC nations will be poised to recover lost rents.
Conventional, low-cost Middle East members of OPEC will be much faster to market than many non-OPEC nations with deepwater prospects requiring sustained exploration and development.
The United States can be the spoiler in this contest if its companies are permitted to compete for the Asian market. If Washington eases the path for exports of oil and L.N.G., it can make these markets more competitive. The United States has now permitted 10 billion cubic feet per day of L.N.G. export capacity to nations with which it has no free-trade agreements. Unrestricted exports would allow new trading relationships to develop between the United States and allies like Japan and South Korea as well as partners like India and Taiwan.
Also — not for nothing — such a policy would avoid ceding oil and condensate markets in Europe and Asia to Iran, should that country comply with the terms of the nuclear deal with the United States and five other nations, and thus secure sanctions relief.
The United States' shale industry has already surprised Saudi Arabia with its resiliency, cutting costs and raising production even as prices for West Texas Intermediate crude shrank from $100 to $45 a barrel.
But the shale industry cannot win a long price war with Saudi Arabia without some relief. Its future lies not in a domestic market with flat and declining gasoline consumption, but in Asia when growth recovers, as well as in a better-diversified Europe and in the emerging markets of Latin America and Africa.
So it is hard to understand why the leading American energy companies and their trade associations are putting more effort into fighting President Obama's initiatives to reduce emissions from stationary power generation sources, methane leakage from oil and gas operations, and emissions of toxic chemicals more broadly.
Given long-term projections of total energy demand, pursuit of these goals is not inconsistent with strong American production over the next several decades.
But by taking a maximalist approach and opposing nearly every climate initiative, the industry is marginalizing itself in the political arena and demonizing itself in the public eye. This is one reason that the oil and gas industry in the United States is viewed far less positively than the industry in Europe.
There is a better path forward that can benefit both American prosperity and national security.
First, the industry should stand down on its opposition to President Obama's authority to start his Clean Power Plan and new ozone rules.
Second, recognizing that comprehensive tax reform is likely early in the next administration, the industry should accept that swapping acceptance and funding of solar and wind tax expenditures for declaring all oil and L.N.G. exports in the national interest under existing authorities is an excellent bargain.
Third, American producers need to understand that time is of the essence — the prospects of an OPEC production cut in the near term are low. In order to provide price relief to its competitors, many of which are geopolitical foes, Saudi Arabia would probably want a commensurate production cut from non-OPEC member Russia, an allocation of production quotas with Iran and Iraq that it would view as fair, and genuine Iranian efforts to decrease or cease its support for proxies in the Middle East.
These are concessions Saudi Arabia is unlikely to attain.
The Obama administration would be wise to grant American producers the export relief they seek, in exchange for the extension of solar and wind credits and subsidies that are critical to its Climate Action Plan.
For economic reasons, the United States should make every effort to sustain its energy boom, which has provided low-cost electricity, job growth, investment incentives and climate benefits in an otherwise stagnant economy.
For national security reasons, the United States should deepen energy trade ties with Asia and Europe. It should fear tying Asia's future energy demand to the Middle East, not facilitate it.
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