What is the Fuel of the Future for the US?
On Wednesday, Senate Majority Leader Harry Reid is expected to put the Pickens Plan for energy independence up before the Senate.
The bill would create a 10 year plan to fund solar, wind and natural gas initatives. Also included in the plan are tax credits which are designed to speed up the adoption of vehicles running on natural gas. Reid's plan is slightly different than T. Boone Pickens' original proposal, which emphasized wind power (an area in which Pickens hads a substantial financial stake). Pickens later changed his plan—and his investment strategy—to include a broader array of alternative energy plays, including a larger role for natural gas.
Many on Wall Street and on the Hill doubt Reid's bill will pass because the relatively low price of oil has sapped the political drive for alternative energy. In fact, one of my energy contacts told me he is telling his clients his Pickens Plan "power play" is to buy more oil companies!
I decided to sit down with two people to get their perspectives on the plan. Gregory Boyce, Chairman and CEO of Peabody Energy, the world's largest private sector coal company, and Richard Soultanian, Co-President of the utility cost management firm, NUS Consulting.
LL: Do you agree with the Pickens Plan?
GB:The compelling aspect of the Pickens Plan would relate only to major fleets that could benefit from centralized refueling stations at the end of shifts. The challenge is that the Pickens Plan doesn't address the use of low cost natural gas to restore basic industries that were destroyed when gas prices soared in the past decade.
Hundreds of thousands of jobs were loss and billions of dollars of negative economic impact flowed from chemicals, fertilizers and other basic industries abandoning the U.S. That's where the focus on natural gas use should be today.
RS: At the outset, let me point out that I do not agree entirely with the Pickens Plan. In principle, however, I agree that it is appalling that the United States lacks a comprehensive energy policy to take it into the future. For decades successive administrations of both parties have paid lip service to the idea of a national energy policy but never developed and implemented one.
The reasons are complex but the end result is the same. It is clear that forward looking countries like Germany, the UK, France and China (to list a few) have developed and implemented (or are implementing) coherent and sound energy policies and as a result will have a clear future advantage over the United States. For this reason I believe that one clear positive of the Pickens Plan is that it is drawing attentions to a significant problem and could act as a small step forward.
LL: There is a lot of criticism out there that why should the taxpayers fund Picken's plan. That he or the firms he owns might benefit financially from federal aid. Is this true?
RS: It is clear that Pickens himself has made substantial investments in renewal energy and that to a certain extent his plan is self-serving and will benefit is own interests. However, the plan will also benefit the long run interests of the US and therefore any passage should ensure that funds will only go to companies that have competitively tendered for projects and that the government has a methodology for ensuring that tenders are transparent and award on the basis of cost/benefit not access and favor.
LL: Will this plan generate any jobs?
RS: Yes, I believe so. Countries like China and Germany are heavily subsidizing renewable energy and there has been a clear impact on job creation in this area. As such significant investment by the US government in wind and solar energy power production will create jobs may be not for manufacturing which is likely to be undertaken in a low cost jurisdiction like China but most certainly for installation and maintenance. Also, new facilities will require expansion of the transmission grid systems which will also create local jobs.
LL: What kind of impact could this bill have at the pump or in heating our homes?
GB: History shows that natural gas prices quickly become strained when new demand emerges. Gas prices soared in the past decade as power plants started to compete with homes, churches and schools for the same energy. It took massive new shale gas drilling and a recession of a lifetime to see natural gas prices abate—for now.
RS: The US uses approximately 20 MM barrels of oil a day (this includes finished products)—about 25 percent of global production. The part of the Pickens Plan that will mostly likely effect oil prices is the conversion of trucks and transport from gas/diesel to natural gas. One must keep in mind that although cars by far outnumber trucks—trucks are much heavier users and eliminating all or a significant part of this consumption will represent a substantial reduction in oil for the US.
Today, natural gas prices are very cheap and with lots of new discoveries and new techniques (like fracturing) we have significant quantities of available gas—Pickens Plan may place some upward pressure on natural gas pricing but it will most likely remain relatively cheap in comparison to oil.
LL: We were here in the 80's and 90's and the price went from $4-$12 . What are the unintended consquences of this bill?
GB: Natural gas cost four times more than coal this past decade. It would be folly to make long-term decisions from natural gas prices that have only recently dipped. As one environmentalist noted recently… the best way to ensure $10.00 natural gas is to plan for $4.00.
LL: The message of Picken's plan and out Washington is to reduce our dependence on foreign oil. Our imports have been on decline. According to the EIA, we now import less than what we produce. Why isn't there a bigger push for drilling here?
RS: As stated earlier, today global consumption is around 85 MM bbls per day and the US consumes around 15 MM bbls of crude oil (ex products) per day. At present the US produces about 5.5 MM bbls of crude per day and imports about 9.5 MM bbls of crude per day. Imports have been on a decline since 2007/2008 due to the economic slowdown/recession—but prior to the downturn imports had increased steadily from roughly 5 to 6 MM bbls per day to a peak of 10.5 MM bbls per day in 2006/2007.
The downturn we have experienced is merely temporary and will last as long as the US economy remains weak. Domestic production of crude has held steady at around 5-6 MM bbls per day—but the truth is that the Gulf region (a major producer) has been showing signs of fatigue and if you look shallow water production has been steadily dropping and the slack has been offset by expensive and more dangerous deep water drilling—BP issue is a prime example. US production is been falling for the past 3 to 4 decades the recent slight increase is not really material in light of the situation.
LL: What about coal? Its a low cost electricity alternative. Where does coal fit in?
GB: Coal is America's major competitive energy advantage. Saudi Arabia has more oil than any nation, Russia has more natural gas, and the U.S. has the most coal reserves.
I recently outlined what I believe to be the best economic and environmental plan for the U.S., which would replace the existing aging coal fleet with advanced coal generation. Doing so would result in $1.2 trillion in economic benefits and 6 million jobs during construction, even while avoiding 440 million tonnes of CO2 emissions.
LL: Why is the success of our domestic drilling hidden? It always seems to be tossed aside. Like a dirty little secret.
RS: The success of deeper water drilling is not hidden—the issue is that it is merely offsetting our losses in other areas like shallow water and Alaska. The US has not been blessed with abundant and deep petroleum reserves like some other countries—the decline over the past decades is proof of this.
Our advances in technology and expertise has allowed us to hold production levels flat after significant and long-lasting declines but the truth is drilling will not be a long or short term solution to the US consumption problem.
LL: What does the new Congress mean for big oil in 2011?
RS: It seems that the new Congress will be much more supportive of big oil—in the sense that they will attempt to loosen regulations and support additional drilling in newly opened tracts. However, as stated previously, this approach may help at the margins but it is not a long-term solution to the countries energy problems. We have lots of natural gas and coal (a less attractive options from a carbon emissions stand-point) but oil reserves are not as plentiful.
LL: The BP oil spill investigations are going on, what will these finding have on the US oil economy?
RS: If these investigations produce concrete analysis of the problems then the entire industry will benefit—much like the investigation the UK government under took with regard to a significant spill years ago in the North Sea which create revised and improved safety standards.
I personally do not believe that the BP spill will have long-lasting impact in the US oil economy—the issues has already significantly faded to the background and prices actual fell will the incident was transpiring (because of the increasing value of the dollar at the time). The impact will be much more long-lasting in the Gulf and the residents thereof. In a perfect world, the results of the investigation will be used and shared by the oil companies to learn from to avoid similar problems and the future and not used as a tool for punishment.
LL: Do you think the make up of this investigative board should have had someone who has drilling knowledge?
RS: Yes, most certainly—there are some very technical issues that require detailed review and a board member with significant drilling knowledge and experience would seem to be indispensible.
LL: Dollar's decent impacting commodity prices. How how high do you think oil can go?
RS: We have written extensively on this topic. The long and the short of its is that the Dollar (and actions by the US Fed) are at present driving commodities prices. Since the Fed announces QE2 the price of oil (as well as other commodities) have skyrocketed as investor have attempted to seek refuge from a falling US Dollar.
I believe that the upward pricing movement of oil unlike other commodities like gold, is limited ultimately by fundamental. Oil, unlike gold, has limited storage and at present there is a lots of oil in storage around the world—US stockpiles alone are at their highest level in decades. Although oil has not traded recently based on underlying fundamental I believe that their exists an upper and lower trading band that will remain intact until fundamental improve or deteriorate further to either support and drag down pricing.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."