Wednesday, February 20, 2013

Gas prices and other energy issues

While clueless WalMart execs try to figure out where their customers have all gone, might I offer a humble suggestion—the filling station.  It very difficult to buy less gasoline.  You could buy a new car that gets better mileage.  You could move closer to your job or find someone to split the driving chores.  But beyond that, there isn't a whole lot you can do when gas prices go up except cut back on spending somewhere else.  And so the economy spends its vitality on the energy it takes to build fires at the rate of at least 4000 per mile.

Americans Haven't Spent This Much Of Their Paycheck On Gas In 30 Years

Global Macro Monitor | Feb. 19, 2013

Paid over $4.00 a gallon this weekend. This high this early in the year brings the gas price back on the macro radar screen.

The EIA notes,

Gasoline expenditures in 2012 for the average U.S. household reached $2,912, or just under 4% of income before taxes, according to EIA estimates. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008, when the average household spent a similar amount.

Lower end consumer getting clocked. Keep it on your radar. more
As a long-term solution to the energy problems, I am not especially impressed with the mini-gas boom caused by fracking.  But it comes at a good time.  Because natural gas prices are lower these days than they have been for awhile, it has slowed the replacement of our aging coal-fired electrical generation equipment with new coal boilers.  As someone who is absolutely convinced that burning coal is THE utterly unacceptable way to power a society, I believe this is a very good thing.  And as someone who believed the best-looking interim solution to our energy problems is a mix of solar (wind) with a natgas backup, it's good to see the new natgas equipment being installed.

Government Not to Blame for Coal Industry Ills

BY SCIENCENOW  02.19.13

By Dan Ferber, ScienceNOW

During the presidential campaign last fall, a single message was repeated endlessly in Appalachian coal country: President Barack Obama and his Environmental Protection Agency, critics said, had declared a “war on coal” that was shuttering U.S. coal-fired power plants and putting coal miners out of work. Not so, according to a detailed analysis of coal plant finances and economics presented Feb. 17 at the annual meeting of the American Association for the Advancement of Science. Instead, coal is losing its battle with other power sources mostly on its merits.

Although the United States has long generated the bulk of its electricity from coal, over the past six years that share has fallen from 50 percent to 38 percent. Plans for more than 150 new coal-fired power plants have been canceled since the mid-2000s, existing plants have been closed, and in 2012, just one new coal-fired power plant went online in the United States. To investigate the reasons for this decline, David Schlissel, an energy economist and founder of the Institute for Energy Economics and Financial Analysis in Belmont, Massachusetts, dove deeply into the broader economics of the industry and the detailed finances of individual power plants.

Schlissel, who serves as a paid expert witness at state public utility board hearings for both utilities and advocacy groups that oppose coal plants, found several reasons for coal’s decline. Over the past decade, construction costs have risen sharply, he said. For example, when the Prairie State Energy Campus in southern Illinois, which opened last year, was first proposed, its then-owner, Peabody Coal, said it would cost $1.8 billion to build. Instead it cost more than $4.9 billion, Schlissel said.

In addition, since the mid-2000s, the price of natural gas has plummeted, and Schlissel found that when coal-fired power has to compete with natural gas on its economic merits, it struggled. For example, profits from the subset of the nation’s coal-fired power plants that sell electricity on the open market plummeted from $20 billion in 2008 to $4 billion in 2011, Schlissel said.

And at the giant, 1.6 GW Victor J. Daniel Electric Generating Plant in Escatawpa, Mississippi, which is run by Mississippi Power, has two coal-fired generator and two natural-gas-powered generators. In 2006, the plant got most of its power from the coal generators, which produced 80 percent of the power they could have if they had been running around the clock at full capacity. Meanwhile, the plant’s two natural-gas-fired generators produced just 30 percent of the power they were capable of. By 2012, those percentages were reversed: the coal generators produced just 25 percent of their possible power, while the natural-gas generators produced 84 percent.These trends indicate that the company profited by burning natural gas more and coal less, Schlissel said.

Coal is also struggling because many power plants that burn it are aging to the point that more parts break and they’re becoming expensive to maintain, Schlissel says. Sixty percent of the nation’s coal plants are more than 40 years old, and the median age of coal plants retired in 2012 was 53 years. If the plants aren’t going to produce electricity for long, the cost of installing expensive scrubbers to comply with long-pending, but newly implemented environmental regulations can be difficult to justify. “It’s like hip transplants for coal plants,” he said.

“I don’t think there’s any question” that coal is losing on its economic merits, says Melissa Ahern, an economist at Washington State University, Spokane, who wasn’t involved in the study. In addition to the factors Schlissel cited, she adds that the costs of shipping coal by train, barge and truck are large and rising, which adds significantly to the fuel’s cost. Aside from that caveat, she adds, that “utilities have incentives to move to natural gas if they can.” more
A here is a pretty well thought out argument that fracking is just another manifestation of a financial bubble.  As someone who long ago learned that the only thing one needed to know about real estate was "When lenders lend, builders build" I am not especially surprised that there is a corollary "When Wall Street throws money at fracking, fracking happens."

When Gas Bubble Explodes, Economy Could Implode All Over Again

By karoli   February 19, 2013

If you haven't already, now would be a good time for you to go buy Matt Taibbi's book, "Griftopia". In the book, he explains with absolute clarity how bubbles are made and how they burst, and how Wall Street manufactures them in order to relieve ordinary people of their hard-earned money.

It is with Matt's book in mind that I read two reports released today about fracking and Wall Street by the Post Carbon Institute and the Energy Policy Forum.

DeSmogBlog boils it down:
Together, the reports conclude that the hydraulic fracturing ("fracking") boom could lead to a "bubble burst" akin to the housing bubble burst of 2008.

While most media attention towards fracking has focused on the threats to drinking water and health in communities throughout North America and the world, there is an even larger threat looming. The fracking industry has the ability - paralleling the housing bubble burst that served as a precursor to the 2008 economic crisis - to tank the global economy.

Playing the role of Cassandra, the reports conclude that "the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble..." a summary details. "Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes."
I'm certain these reports will be dismissed as the left-wing answer to right-wing climate change deniers. Before naysayers do that, they should consider the sources behind the report.

The Energy Policy Forum is run by Deborah Rogers. Here's part of her bio:
Deborah Rogers began her financial career in London working in investment banking. Upon her return to the U.S., she worked as a financial consultant for several major Wall Street firms, including Merrill Lynch and Smith Barney. Ms. Rogers then struck out on an entrepreneurial venture in 2003 with the founding of Deborah’s Farmstead, an artisanal cheese-making operation, and quickly established the company as one of the premier artisanal dairies and cheese makers in the U.S., the cheese having won several major national awards.
Not exactly what you'd call an anti-Wall Street type, right? What she has to say in the intro to the full report is stunning:
It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. This price decline, however, opened the door for significant transactional deals worth billions of dollars and thereby secured further large fees for the investment banks involved. In fact, shales became one of the largest profit centers within these banks in their energy M&A portfolios since 2010.The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions.

As prices plunged, Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets. In addition, the banks were instrumental in crafting convoluted financial products such as VPP's (volumetric production payments); and despite of the obvious lack of sophisticated knowledge by many of these investors about the intricacies and risks of shale production, these products were subsequently sold to investors such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007.
That second paragraph highlight should be quite familiar to anyone who has done even the most cursory reading on the housing bubble.

The Post Carbon Institute has been in existence since 2003, and seeks to influence policies for social, economic and environmental sustainability. Their report, entitled "Drill, Baby, Drill", argues that the US does not have the resources to be energy-independent, or to export oil and gas at the rate it's being done now.
The U.S. is a mature exploration and development province for oil and gas. New technologies of largescale, multistage, hydraulic fracturing of horizontal wells have allowed previously inaccessible shale gas and tight oil to reverse the long-standing decline of U.S. oil and gas production. This production growth is important and has provided some breathing room.Nevertheless, the projections by pundits and some government agencies that these technologies can provide endless growth heralding a new era of “energy independence,” in which the U.S. will become a substantial net exporter of energy, are entirely unwarranted based on the fundamentals. At the end of the day, fossil fuels are finite and these exuberant forecasts will prove to be extremely difficult or impossible to achieve.
The fundamentals are not sound and Wall Street investment bankers are playing games with the markets to keep us thinking they are while people like the Kochs pocket profits hand over fist.

If you don't believe the reports, consider this: The oil and gas statistics President Obama cited in his State of the Union address came from a known hired gun for the oil and gas industry.

These reports are game-changers, in my view, because even if you think it's just fine for oil companies to continue fracking their way to prosperity, they could well plunge the rest of us into a deep, dark hole where 2008 will seem like heaven. more

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