Energy Boost

By William M. Arnold 

This article originally appeared in The Hill. 

The early days of 2018 are a good time to consider America’s energy landscape and how it impacts our broader global competitiveness. The outlook is good.

The shale revolution in the U.S., OPEC’s varied responses, changes in federal regulations, as well as the cost of oil and gas here, relative to the rest of the world, all impact the country’s economy.

These dynamics have been in active play for close to a decade but seem to have reached a “new normal” in recent months.

The implications of the shale revolution are many. It provides an unprecedented level of energy security as U.S. production reaches levels unseen for 30 years and puts us among the top three producers in the world. Politically, this provides some immunity from crises in places like Venezuela and Nigeria.

It also encourages energy companies, large and small, to invest tens of billions of dollars back in the U.S. over countries with less stable business environments. That translates into high-paying jobs and economic growth in places like West Texas, North Dakota and Pennsylvania.

OPEC’s response has been erratic since the collapse of oil prices three years ago. In early 2015, many U.S. producers bet, to their misfortune, that OPEC would cut its own production to stabilize prices above $70 a barrel. Instead, OPEC let market dynamics rule and prices collapsed by more than 70 percent into the high $20s.

More recently, OPEC and other major producers like Russia agreed to cut production, and they showed discipline in the implementation. That helped drive prices to about $60 in the U.S. and $65 outside the U.S. (the “Brent” market). The $5 difference between oil in the U.S. and the rest of the world adds to our competitiveness as the price of refined products plays out in the cost structure of economies.

While oil prices have rallied, U.S. natural gas continues to be cheap (aside from Arctic weather spikes) because of abundant supplies, new technology, infrastructure, ease of market entry and available capital. This has led to the rapid-paced closure of uncompetitive coal-fired power plants across the country. A consequence of this has been the drop in America’s carbon dioxide emissions to a 20-year low.

Many of the nations with which we compete in Europe and Asia pay two to three times, or more, for the clean-burning fuel that provides residential, commercial and industrial power. America is now exporting natural gas that supports the independence of vulnerable countries like Lithuania, which had been dependent on Russian supplies until they built a facility to import liquefied natural gas.

Cheap natural gas is also having a dramatic effect on the nuclear power industry. Many U.S. facilities were built decades ago and are at the point where they would need major refurbishment. But in the current price environment, many of these plants are slated for closure instead of renovation, which would cost tens of billions of dollars. New facilities are few and have been subject to dramatic cost overruns.

Wind power has emerged as a growing source of energy, at times providing a majority of power supplied in Texas, home to the greatest concentration of producing turbines in the U.S. The prospect for offshore wind, which has been a factor in Europe for many years, adds to the potential.

Subsidies are still an important economic component and interstate transmission is a challenge. Solar has grown exponentially but from a very small base, with sharply declining costs, but has had less widespread impact.

The Trump administration has attacked regulation broadly, especially in energy. The recent proposal to open nearly all offshore areas to oil and gas drilling — in Alaska, the Eastern Gulf of Mexico and the Atlantic and Pacific coasts — is a dramatic example.

There will be political and environmental challenges. The lease sales would run between 2019 and 2024, when prices for oil and gas are difficult to foresee.

Previously, President Trump announced he would abandon the Obama administration’s Clean Coal Plan that had already been suspended by the U.S. Supreme Court. In contrast, the Department of Energy has proposed initiatives, now pending, to provide financial support to coal and nuclear because of their reliability of supply for power generation.

Also, disputes over regulation of fracking on federal lands tipped in favor of state regulators. And the Interior Department is rolling back offshore drilling safety rules in light of the industry’s adoption of new safety practices.

The recently signed tax overhaul drops the corporate rate for all industry. Ironically, though, companies like Royal Dutch Shell had to take billion-dollar financial charges in the fourth quarter of 2017 because this impacted the value of tax losses that they carry forward. But the dramatically lower federal taxes will favor U.S. production as companies decide on future portfolio allocations.

The convergence of these seemingly diverse factors combine to provide a fruitful basis for strength across the U.S. economy as 2018 gets underway.

Bill Arnold was a professor in the practice of energy management at the Jones Graduate School of Business at Rice University.