GWPF Newsletter: The $3.5 Trillion Fracking Economy Is About To Get A Lot Bigger

OPEC’s Nightmare Scenario: U.S. Frackers Are Winning The Oil War

In this newsletter:

1) The $3.5 Trillion Fracking Economy Is About To Get A Lot Bigger 
The Daily Caller, 17 December 2016
 

2) OPEC’s Nightmare Scenario: U.S. Frackers Are Winning The Oil War 
The American Interest, 18 December 2016

3) In Oil Face-Off, Saudis, Shale Both Claim Victory 

The Wall Street Journal, 15 December 2016
 

4) Trump Opens The Door To U.S. Energy Independence 
Investor’s Business Daily, 16 December 2016
 

5) Britain, Trump And The Social Cost Of Carbon 
Global Warming Policy Forum, 17 December 2016
 

6) Chris Edwards: Time To End All Energy Subsidies 
Downsizing the Federal Government, 15 December 2016

Full details:

1) The $3.5 Trillion Fracking Economy Is About To Get A Lot Bigger

The Daily Caller, 17 December 2016Andrew Follett

Hydraulic fracturing generated $3.5 trillion in new wealth between 2012 and 2014 in spite of falling oil prices, according to a new study, but today’s rising prices could be even better for the U.S. economy.
 

From 2012 to 2014, the shale oil industry generated 4.6 million new jobs due to an energy boom and the resulting low gas prices, according to a study published by the National Bureau of Economic Research (NBER). Expensive energy could be a huge net positive for the U.S. fracking economy because rising oil prices mean more drilling.
 

Oil prices fell to a record low of $30 a barrel during the previous year, sharply reducing the industry’s profit margins, which are now rising again. Researchers estimate that new economic activity from fracking technology created around 4.6 million net new jobs, but only about 1.6 million of these new jobs were directly linked to the oil industry, while many of the rest were due to lower gas prices and the positive effect that had on the American economy.
 

“What’s often overlooked is the impact that the shale revolution has had throughout the economy,” Chris Warren, a spokesperson for the pro-industry Institute for Energy Research (IER), told The Daily Caller News Foundation. “Lower energy prices mean people have more money to save or spend on other day-to-day necessities. More energy production leads to job creation in other sectors of the economy, whether it’s manufacturing, healthcare, education, etc.”
 

As prices rise again, money will have to be spent on expensive gasoline and energy, which instead could have been used stimulating the local economy, financing investment or saved.
 

The NBER study concluded the vast majority of new oil development occurred on privately held land, because getting permission to drill on federal land was exceedingly difficult during the study period.
 

“The NBER study is consistent with a study we released last year that looks at the future economic impacts of opening federal lands to energy development,” Warren told TheDCNF. “That study found that opening up federal areas to natural gas, oil, and coal production could create 2.7 million jobs over the next 30 years and lead to $20.7 trillion in economic activity over the next 37 years.”
 

Opening federal lands for natural gas creates a huge number of high-wage jobs inside and outside the energy industry, according to a the study published last December by Louisiana State University and IER.  Fracking has already created an estimated 1.7 million jobs and will likely create a total of 3.5 million  by 2035.
 

Full story

2) OPEC’s Nightmare Scenario: U.S. Frackers Are Winning The Oil War
The American Interest, 18 December 2016
 

If you listen closely, you can hear the cursing of OPEC’s (and Russia’s, for that matter) oil ministers bursting forth from their beleaguered petrostates as America’s oil producers add to their collective count of active rigs for the seventh straight week. The cartel—along with some other non-member petrostates—is now committed to cutting its collective oil production, hoping to ease the global glut and induce a price rebound. But that price rebound will help everyone in the business of selling oil, and will be especially welcome to America’s shale producers, many of whom were forced to shutter rigs and ratchet down production when the crude price collapse made such projects unprofitable. Now that prices are starting to rise again, U.S. producers are wasting no time revving the engine of the shale boom. Reuters reports:
 

 Drillers added 12 oil rigs in the week to Dec. 16, bringing the total count to 510, the highest since January, but still below 541 rigs a year ago, energy services firm Baker Hughes Inc said on Friday.
 

 Since crude prices briefly recovered from 13-year lows to around $50 a barrel in May, drillers have added oil rigs in 26 of the past 29 weeks for a total of 194, the biggest recovery in rigs since a global oil glut crushed the market over two years.
 

 Almost two-thirds of the rigs added since May, or 121, were in the Permian basin, the nation’s biggest shale oil formation located in west Texas and eastern New Mexico, bringing the total there up to 258, the most since April 2015. 
 

This isn’t the first time we’ve said this, but it bears repeating: this was always going to be the Achilles heel of any OPEC decision to reduce its collective production. Shale operations are much smaller than conventional fields, and are therefore more responsive to price pressures—there are less up-front capital costs to justify the continued operation of unprofitable fields, or to delay the re-opening of operations in areas that become profitable once again. That’s why we saw American oil production drop more than 1 million barrels per day (bpd) from June of this past year to October of this year. But that’s also why we’ve seen America’s total oil output increase 300,000 bpd over the past month and a half.
 

Saudi Arabia knew this was going to happen, and it delayed any sort of OPEC market intervention for as long as it could, but the economic damage wrought by bargain oil finally forced Riyadh to concede to coordinated action this fall. So far, oil prices have risen roughly $10 per barrel—an increase of more than a 20 percent—but it’s not clear that this cut will be able to completely erode the glut that brought crude prices down in the first place because, as was just outlined, frackers are especially well positioned to take advantage of the rebound and offset much of OPEC’s drawdown.
 

We’re headed towards the worst-case scenario for the world’s petrostates, where they agree to cede market share to gain higher oil prices, only to see American companies jump on the opportunity and take that share of the market for themselves while simultaneously blunting the rebound. Hence the wailing and gnashing of teeth from all those oil ministers.
 

Full post

3) In Oil Face-Off, Saudis, Shale Both Claim Victory

The Wall Street Journal, 15 December 2016Benoit Faucon, Alison Sider and Georgi Kantchev

A two-year battle for global oil supremacy that pit Saudi Arabia, the de facto leader of OPEC, against upstart U.S. shale producers left them both badly wounded but with each side claiming victory.
 

The Organization of the Petroleum Exporting Countries deal last month to cut oil production has sparked a powerful rally after crude prices had fallen by half over the past two years. That slide followed OPEC’s decision in late 2014 to maintain production levels, despite a global glut.
 

For U.S. shale companies, it was two years of shrinking profits and mass layoffs as dozens of producers scaled back output or sought bankruptcy protection. But the survivors became much more efficient and are now eager to grab market share at their foreign competitors’ expense.
 

“Definitely, the U.S. is going to win the next two years because OPEC is cutting and U.S. shale is taking off,” said Scott Sheffield, chief executive of Pioneer Natural Resources Co., a U.S. producer that is already ramping up drilling in West Texas’ Permian Basin.
 

In Saudi Arabia, two years of lower oil prices have greatly slowed economic growth, widened a budget gap and led the government to cut fuel and other popular subsidies in moves that risked stirring public discontent.
 

Yet the collapse in crude prices didn’t stop OPEC from gaining global market share as shale retreated. It also helped jump-start Saudi Arabia’s plans to move away from a decadeslong dependency on oil. The kingdom raised a record $17.5 billion with its first global bond deal in October.
 

Now, Riyadh is betting that a period of rising prices following the production cut could boost a vast initial public offering of the state-owned Saudi Arabian Oil Co. An IPO of just 5%, as planned for 2018, could fetch over $100 billion and help fund an expansion of the Saudi economy into other sectors such as technology and mining, Saudi officials said.
 

Shale producers may also have a small window to take advantage of higher prices. OPEC and other major producers have pledged to cut output only for six months, and the group has a history of exceeding production quotas.
 

Saudi Arabia two years ago elected to counter a rise in U.S. output with a flood of its own. Ali al-Naimi, Saudi oil minister at the time, denied he was targeting shale but often said he wanted to force out of the market the “high-cost producers,” a phrase often interpreted to mean U.S. shale. Back then, many shale producers couldn’t break even unless crude prices were about $80 a barrel.
 

Two years of low prices pounded the U.S. oil industry. More than 100,000 energy workers have lost their jobs. The services companies that help drill and pump oil have jettisoned people and equipment.
 

While activity in the Permian Basin is booming, other once-bustling shale formations in south Texas and North Dakota haven’t recovered.
 

But U.S. oil and gas producers raised more than $50 billion through secondary offerings in the stock market during the past two years, a financial lifeline that kept many afloat despite their debt.
 

Many were able to raise this money by persuading investors that they could adapt faster than OPEC realized. These producers made strides in technology and drilling techniques, driving costs down to where they can get by at oil prices of just over $50 a barrel, said U.S. Energy Secretary Ernest Moniz in an interview last week.
 

“The cost of production next year is going to be a lot less than the cost of production last year,” Mr. Moniz said. As long as OPEC holds to its promise to cut back output, “you’ll see some of that shale oil coming back,” he said.
 

Full story

4) Trump Opens The Door To U.S. Energy Independence

Investor’s Business Daily, 16 December 2016Merrill Matthews

President-elect Donald Trump’s decision to nominate former Texas Governor Rick Perry to head the Department of Energy opens the door to U.S. energy independence in the near future — not to mention a growing economy, fueled by private-sector investment and high-paying jobs.
 

In other words, a radical break from the past eight years of the Obama administration.
 

Trump has outlined several steps he wants to take in energy policy. First, he has pledged to roll back the obstructionist regulatory efforts of the Environmental Protection Agency.  And no one will be better at achieving that goal than Oklahoma Attorney General Scott Pruitt, who Trump picked to run the agency.
 

For years now, Congress has been ceding tremendous power to federal agencies, and bureaucrats have gladly embraced that handover.  But under President Obama, several federal agencies decided to expand their legal mandate to an ideological mandate — and no agency more so than the EPA.  Look for Pruitt to rein in that agency and slap down its power grab.
 

Second, the president-elect has promised to revisit the Keystone XL pipeline decision.
 

Government environmental-impact studies cleared the pipeline to proceed. Waiting until voters could no longer express their disapproval at the polls, Obama finally decided to squash the infrastructure project — along with the thousands of high-paying jobs needed to build it.
 

Similarly, the Dakota Access pipeline had received needed government approvals and was nearly complete when the Standing Rock Sioux tribe — along with hundreds of environmentalists and celebrities looking for a photo-op — decided to try to stop it. Obama did his best to help them. A Trump administration is likely to remove any remaining barriers so that pipeline can be completed.
 

Third, Trump has said his administration will allow more drilling on federal land. That would be a big step toward achieving true energy independence.
 

The U.S. is now the largest producer of crude oil and natural gas in the world, but we still import about 25% of the crude we need. Opening up more federal lands and offshore production will allow us to fill that gap.
 

Trump has pledged to use the billions of dollars in federal mineral royalties to help pay for his ambitious infrastructure rebuilding program. A better use of those funds would be to offset the costs of his tax reform proposal.  But either way, it’s refreshing to talk about growing government revenues without growing taxes.
 

Increased production will also allow the U.S. to export more crude oil and natural gas to our allies, many of whom rely on Russia for their energy needs. For example, the European Union depends on Russia for about a third of its energy and would love to have an affordable alternative. Moving the U.S. from oil importer to oil exporter will also dramatically reduce our trade deficit, another Trump goal.

 

Finally, Trump has pledged to revive the coal industry, especially “clean coal.” That promise may be a bridge too far. While the EPA has indeed been hounding the coal industry beyond all reason, competition from natural gas is doing as much if not more damage.
 

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5) Britain, Trump And The Social Cost Of Carbon

Global Warming Policy Forum, 17 December 2016Dr John Constable: GWPF Energy Editor

The Social Cost of Carbon (SCC) is the single most important tool in evaluating the effectiveness of climate change mitigation policies, such as subsidies to renewables. However, the UK government has quietly ceased to use this measurement, almost certainly because after a decade of subsidy the policy cost per tonne saved is still greatly in excess of even higher estimates of SCC.
 

The ‘solution’ is worse than the problem. The Trump administration is likely to focus on the Social Cost of Carbon in its reforms, probably introducing more reasonable and lower estimates, increasing pressure on the UK government amongst others to re-examine their climate policies.
 

Amongst those favouring the current global climate policy agenda there is some anxiety that Mr Trump’s appointees to the Federal Government’s Environmental Protection Agency (EPA) will insist on revisions to the estimates Social Cost of Carbon (SCC), that is to the monetized estimates of the harm to human interests incurred by the emission of a specified quantity of carbon dioxide, usually a tonne, at a particular time.
 

The EPA’s current estimates are presented for a variety of discount rates, and one figure to indicate the high end of the range, the 95^th percentile.
 

The EPA estimates that in 2015 the Social Cost of Carbon ranged between $11/tCO₂ to $56/tCO₂, depending on discount rate, and the high end of the range was $105/tCO₂. In 2030 the EPA’s figures range from $16 to $73 per tonne, with a high end of $152 per tonne.
 

Estimating future harms in this way is obviously difficult and even in the best of hands will be prone to error. The breadth of the central range, $11 to $56 per tonne tells you all you need to know. The numbers come with a health warning.
 

Nevertheless it is obvious that economists will wish attempt this calculation since it gives them some means of evaluating the emissions savings costs of current policies. An abatement cost that is higher than the Social Cost of Carbon is more harmful than the climate change caused by the emission of that saved tonne. In other words, it would be entirely rational to prefer the climate change to the cost of emissions saving. It is axiomatic that policy abatement costs must be below the Social Cost of Carbon, and ideally well below so that there is no doubt that the policy is preferable to climate change itself.
 

However, it is a curious fact that while specialist authorities such as Professor Hope of the Judge Business School at Cambridge is concerned that Mr Trump’s administration may revise the EPA’s estimates downwards, there is in fact very little discussion of Social Cost of Carbon in general climate policy debate. Indeed, the UK’s Department of Business, Energy and Industrial Strategy (BEIS) has simply stopped talking about it. The Department’s web page admits the fact:
 

“Carbon valuation for policy appraisal no longer uses the social cost of carbon.“
 

The Department then, bizarrely, goes on to note the importance of SCC rather than explaining why it has been dropped.
 

“The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.”
 

Quibbles about the use of the word of ‘society’ in this context aside, that is correct, so why did the UK government decide to abandon the use of SCC, and why has there been so little progress with its replacement, the Shadow Price of Carbon?
 

Even reference to the Treasury’s Green Book, the core reference for policy appraisal guidance, contains only vague references to SCC, and via a footnote sends the reader on further hunt for a Government Economic Service paper on Estimating the Social Cost of Carbon Emissions. This can, with a little work, be found in the National Archives. It dates from 2002.
 

Even a sympathetic observer would have to conclude that the UK Government’s work on the Social Cost of Carbon, or putative replacement, is half-hearted, dated and extremely confusing. Why have they lost interest?
 

The answer is that even conservative and approximate estimates of policy abatement costs are vastly in excess of any rational estimate of Social Cost of Carbon.
 

For example, using the UK’s grid average emissions factor we can provide a rough approximation to the displacement of emissions through the generation of a MWh of renewable energy. The emission factor in the UK electricity system has fallen very significantly over the last decade because of the retirement of older coal generation stations. In 2009 the grid average emissions factor stood at 0.45 tonnes per MWh, while in in 2015 it was only 0.33 tonnes per MWh.
 

Thus by calculating the subsidy paid to a generator we can estimate the cost per tonne abated. It should be noted that this results in a conservative cost estimate since it would not include the system costs imposed by uncontrollably variable generators such as wind and solar.
 

UK onshore wind is subsidised under the Renewables Obligation at just over £40/MWh, and offshore wind at double that amount. At an emissions factor of 0.33 tonnes per MWh onshore wind power in the UK has a subsidy abatement cost of about £121 ($150) a tonne, and offshore of £242 ($300) a tonne.
 

These costs exceed even the high-end figures estimated by the US EPA, and are many times the central figures. Clearly the UK’s policies are not cost-effective. Indeed, they are actually substantially more harmful to human wellbeing than the problem they claim to address. This is almost certainly not an isolated case; it would be interesting to know whether any policies, national or global, urged in the name of climate change mitigation actually have abatement costs below the Social Cost of Carbon, even at the current and perhaps exaggerated levels suggested by the Environmental Protection Agency.
 

The rumours that Mr Trump’s administration will put the EPA’s SCC calculations under intensive scrutiny is clearly important. – Have they, for example, made reasonable allowance for the benefits of rising carbon dioxide levels, of the kind highlighted by Matt Ridley in his GWPF lecture?
 

Perhaps even more important is that the reformed EPA reviews the abatement costs of all its policies in the light of the SCC estimates. And while they are about it, perhaps they would have time to look at the United Kingdom’s policies too. An objective view would be very welcome.

 

6) Chris Edwards: Time To End All Energy Subsidies

Downsizing the Federal Government, 15 December 2016
 

All energy subsidies should be ended. The shale revolution shows that businesses and markets can generate major innovations and progress with their own resources. Investors and major corporations have stepped up to the plate and pumped billions of dollars into alternative energy technologies. The U.S. energy sector is vast, dynamic, and entrepreneurial, and it does not need subsidies to thrive.
 

The federal government has subsidized the energy sector for decades. Subsidies originally stemmed from atomic energy research efforts in the 1950s. Further subsidies were added in response to the energy crisis of the 1970s. And in recent decades, concerns about energy conservation and climate change have prompted the government to expand its efforts further.
 

Today the Department of Energy (DOE) and other federal agencies run an array of spending programs in support of the conventional and renewable energy industries. The government also provides about two dozen special breaks for energy activities under the income tax. This study focuses on the DOE’s spending record, and highlights some of its misguided and mismanaged projects over the years.
 

Looking at the DOE’s budget of $27 billion for 2016, the largest activity was nuclear weapons research, development, and security, which cost $11 billion.¹ The second largest activity was environmental cleanup of nuclear weapons sites, which cost $6 billion. Most of the rest of the DOE budget was for nondefense activities, as follows:
 

• Science. $5.4 billion on physics, fusion energy, computing, and other basic research.
• Renewable Energy. $2.2 billion on solar and wind power and other green activities.
• Nuclear Energy. $939 million on civilian nuclear programs.
• Fossil Energy. $640 million on coal, oil, and natural gas programs.
• Advanced Research Projects. $382 million on various energy technologies.
• Electricity Delivery. $250 million on electricity transmission programs.

DOE spending on these sorts of subsidy activities has been fraught with failure. Billions of dollars have been wasted on ill-advised and mismanaged projects, as discussed in the nine case studies below. From the Clinch River Breeder Reactor failure in the 1970s to the recent Solyndra scandal, DOE projects have often turned into boondoggles.
 

DOE subsidy programs and applied research should be ended as an unneeded intrusion into private business activity. American businesses spend billions of dollars a year on research into conventional and renewable energy sources. One problem with subsidies is that they can steer those private resources in the wrong direction, away from the most efficient energy solutions.
 

Policymakers often support subsidies to further a grand vision, such as creating a “green economy” or making America “energy independent.” But top-down visions ignore marketplace realities and consumer preferences, and the DOE would be incapable of implementing them with competence anyway, as the following sections illustrate. [...]
 

Time To End Energy Subsidies
 

U.S. energy markets have changed dramatically over the past decade. Technological advances in the oil and natural gas industries—particularly hydraulic fracturing and horizontal drilling—have led to large increases in domestic production. U.S. imports of oil and gas have plunged, while exports have increased. U.S. businesses and consumers have benefited as gasoline and natural gas prices have fallen in recent years.
 

This energy revolution was driven by private innovation and competitive markets, and it has created environmental as well as economic benefits. Cleaner natural gas is replacing coal as a fuel source in U.S. electricity production.⁹⁷ Over the past decade, coal fell from 49 percent of electricity production to 33 percent, while natural gas rose from 20 percent to 33 percent.
 

The share of electricity production from renewables, such as solar and wind, has also increased, which is generally thought to have benefited the environment. However, no source of energy holds the environment harmless. The Ivanpah solar project kills thousands of birds each year. Wind farms kill hundreds of thousands of birds and bats each year. Dams for hydropower create a range of problems, including harm to wetlands and salmon spawning. And subsidized ethanol for vehicle fuel has a dubious environmental record.

This essay has described some of the failures of DOE’s spending over the decades. DOE programs have distorted markets and have suffered from mismanagement, cost overruns, and cronyism. The federal government creates further distortions with an array of special breaks for energy under the income tax.
 

All of these energy subsidies should be ended. The oil and gas revolution shows that businesses and markets can generate major innovations and progress with their own resources. Furthermore, investors and major corporations have stepped up to the plate and pumped billions of dollars into alternative energy technologies in recent years. The U.S. energy sector is vast, dynamic, and entrepreneurial, and it does not need subsidies to thrive.
 

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The London-based Global Warming Policy Forum is a world leading think tank on global warming policy issues. The GWPF newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at www.thegwpf.com.