All Fracked Up and Nowhere to Go

I read an interesting article in The Economist this week regarding LNG exports in the US. This is a rather interesting article, so please read the full version for yourself.

LNG TankerYears ago, when the US thought they would have to import LNG’s from abroad there was a massive build out of over 24 LNG plants for regassification.  Thanks to horizontal drilling and hydrologic fracturing, the US will not have to worry about LNG imports for the next century at the earliest.  Converting these regassification plants to be export terminals makes economic sense and environmental sense.  With the exception of Sabine Pass in Louisiana who was just recently granted permission to export, all that equipment now sits idle along the gulf coast.

At the heart of the issue is the fact that American gas now sells for $3.40 per MBTU domestically but over $12 in Europe and up to $20 in Asia.  Turning American nat gas to LNG cost about $5 per MBTU, so exports of LNG can be beneficial to the economy.  Furthermore, the glut of natural gas has actually forced producers to stop producing until the supply dwindles or demand picks up.  Tapping the international markets would allow this process to balance out.  Of course, there is steady opposition to LNG exports from uncommon bedfellows of environmentalist and business proponents who respectively oppose fracking on environmental grounds and who want to maintain their access to cheap fuels.

I have gone back and forth on the subject of fracking several times now but generally agree with the economic arguments set forth in this article.  While I am not a proponent of fracking, the following issues deserve mention:

  • Nat Gas is priced on a regional market as opposed to a global market.   The lack of export infrastructure acts as a subsidy thereby keeping the price of gas artificially low and promoting inefficient use of the fuel.  Increasing LNG exports will increase the price but will hopefully establish a free and transparent market.  The revenues of the fuel trade should be used in clean technology research and developing next generation technologies.
  • With cheap nat gas prices in the USA, developing nations have been leaning towards coal to fuel their consumption.  Access to natural gas will hopefully reduce the emissions in the developing world more than if the gas were kept in the US.

ny_fracking_rallyThese two points rely on the assumption that fracking remains legal.  As I write this, a moratorium on fracking (bill A.5424-A) was just passed by the Assembly and will go before the NY State Senate and then on to the Governor for signature.

Clean technology has never been more affordable or accessible to the masses.  Policy makers are now realizing the national security and economic concerns of relying on fossil fuels.  Clean, distributed sources of energy combined with sustainable development are our best options for a healthy, prosperous future.

Tonight’s the Night: Will the President Speak on Renewable Energy and Climate Change

Seal of the POTUSThe State of the Union speech marking the beginning of a Presidents second term has historically been a chance for the President to lay out big, hairy, audacious goals for the upcoming administration.  Reagan had tax reform, Clinton had education, and GW had Social Security reform.  Some were achieved while others failed.  So too tonight, Obama will lay out his agenda for the next four years.  Given the economic condition of the US right now, it is rightly expected that jobs will be a major theme of the speech, but some others for consideration:

  1. Jobs, Jobs, Jobs
  2. Deficit Reduction
  3. Economic Growth
  4. Immigration
  5. Gun Violence

Missing from this list is Climate Change.  Will the President even mention those words tonight?  With North Korea’s nuclear test last night, I expect the President to devote more time and attention to foreign policy issues rather than outlining climate initiatives.  Prove me wrong Mr. President.

Question for my readers:  Will Obama mention Climate Change or Renewable Energy in tonight’s State of the Union address?

Melting Ice Caps

The ice sheets on Greenland and Antarctica are melting, sea levels are rising, and the rate of ice loss is increasing.  These are the conclusions a new peer-reviewed report published in the journal Science came to.  The study, authored by 47 experts from 26 institutes, used satellite images to show that the ice sheet melting has contributed to an 11 mm (0.4 in) rise in sea levels.  The Greenland ice sheets contributed 2/3 to this rise while Antarctica contributed the remaining 1/3.  Also startling were the comments on the Pine Island Glacier, an iceberg the size of New York City that is set to calve off in the upcoming months.  While most of this information is probably not news to you, it does offer scientific proof that the planet is warming.  We must act now.  Please inform yourselves about solutions to climate change – whether through cap-and-trade or a carbon tax – and pressure your elected officials to enact policy measures.  The only way to slow the rate of warming is to reduce our emissions through every means possible.  Use less energy by making energy-efficient upgrades to your house.  Write a letter to your representatives to end subsidies for fossil fuels so renewable technologies can compete on a level field.  Or simply turn off electronics when they are not in use.  Climate change is a problem that touches all areas of modern society – it is a national security issue, an economic issue, a development issue, and a humanitarian issue.  And as this study proves it is getting worse.  The paradox is that by the time we see changes that affect us, it may be too late to stop it.

ice sheet

In their own words

“The world is caught in a dangerous feedback loop – higher oil prices and climate disruptions lead to higher food prices, higher food prices lead to more instability, more instability leads to higher oil prices.  That loop is shaking the foundations of politics everywhere.”

-Thomas Friedman

 

“Fortunately, we are not doomed to eternal punishment, as Prometheus was for stealing fire for humankind.  Nor does the dwindling of the old fire of fossil fuels mean a return to the Dark Ages.  Instead, we can create a safer, stronger, fossil-free world by tapping into a far greater resource than fossil hydrocarbons.  The real underlying fuel of America and of modern civilization is innovation and ingenuity.”

-Amory Lovins

The Balance of Power

Few things effect international relations more than the balance of power.  Whether it be water or oil, the first societies to harness the potential of these commodities enjoy the creation of wealth and goods such as cropland in the case of water and industry in the case of oil.  Eventually each sector is going to grow and the demand for the input will outgrow the supply, leading to price hikes that make that commodity even more desired.  Problems exist when the source of these commodities are located outside of that nations borders.  The balance of power is then transferred from the first-mover user to the upstream producer of that commodity.  This is where it gets interesting.  The choice then becomes whether to use soft power (such as diplomacy, aid, or economic development) to gain influence over the producer or hard power (military action, sanctions) to force them to act.  Only by reducing demand for the commodity in question can the consumer nation wrestle back control from the producer nation.  This could include finding a substitute, developing new technology, or learning to use that resource more efficiently.  In the case of water, there is no substitute.  Downstream nations must learn to make the most out of every drop that they have.  This includes studying what crops to plant domestically and supplementing others through trade.  New technology such as desalination plants could also help secure access to clean water, but it will take an economic toll.  In the case of oil, there are several substitutes such as biofuel, natural gas, and plug-in hybrid cars, but while we further explore these technologies, squeezing the most out of every drop seems to make the most financial sense.

From OPEC to CHAOS: How Petro-Dollars Fueled the Arab Spring

Alright, let’s get back to the economics associated with climate change here.  More specifically, the economics of oil and how the accumulation of petro-dollars by oil-producing nations (almost in some cases, did in others) bring about their downfall.  Most everyone remembers the “Arab Spring” that began in December 2010 when a 26-year-old street vendor named Mohamed Bouazizi set himself on fire to protest his continued harassment by the authorities.  As the protest spread among the arab world, the grievances highlighted the lack of opportunity for the youth, state corruption, economic decline, human rights violations, censorship, and other wrong doings on behalf of the ruling party or dictators of these countries .  By March 2011, protest had erupted in 17 countries in the region. 

(Black = Government Overthrown; Dark Blue = Sustained Civil Disorder and Governmental Changes; Light Blue = Protests and Governmental Changes; Red = Major Protests; Beige = Minor Protests)

Now we know the reasons for the protests and the scale of the uprisings, lets take a look behind the scenes at the conditions that set the stage for this upheaval. 

Current Account
In Economics, the Current Account is the broadest accounting of a country’s trade and investment with the rest of the world.  The Current Account measures 4 areas of trade – Merchandise Trade (goods), Services, Investment Income Flows, and Unilateral Transfers such as foreign aid or remittances from workers sending money back home.  The Current Account provides a snapshot on the financial health of the country, and of how much the country is importing and exporting of each area measured.  While there is no direct impact on the stock or bond markets, the Current Account does show how much money is coming in (surplus) or leaving (deficit).  Consistent and increasing deficits could impact the value of the dollar if creditor nations begin to doubt our ability to pay back the borrowing.  If other countries balk at our debt levels, the dollar will depreciate.  Below is a graph of our current account since 1980.

Now when you think of the America’s current account deficit, you probably think of China’s account surplus.  Images of container ships filled with cheap, disposable goods probably came to mind.  But in fact, the largest creditors of America’s current account deficit have been oil-producing nations.  I was recently brushing up on some economic terminology and this theory was confirmed by my Macroeconomics textbook from 2008.  Amazing that the problem was identifiable even back then.  Recently, The Economist published an article called Petrodollar Profusion that contained the graph outlining the current account surpluses as a percentage of GDP for these oil-producing countries.

So what is the problem?  The problem is that the oil exporting countries have been hoarding these dollars instead of spending them.  They could either spend them on imported goods from oil importing countries (machinery from USA for example) or they could put them to use by investing in their own economies and building out infrastructure, improving education, healthcare, housing, or agriculture, thereby creating jobs and building a middle class.  Spending on imports from other countries would grease the wheels of the global economy and balance out the payments.  After all, that is what keeps the world trading.  Instead, most of this wealth was transferred to sovereign wealth funds who further line the pockets of the ruling class.  For more info on sovereign wealth funds and the rise of state capitalism, please see the book The End of the Free Market by Ian Bremmer.  The point is that building the middle class was not what they chose to do, and the protests continued.  

Unemployment
One of the most prominent cries coming out the protests was the lack of opportunities for the young population.  In many of these countries there is a young (age 15-24) and growing population but a disproportionate lack of jobs for them.  Throughout the Middle East, the unemployment has historically hovered around 12% overall, but the unemployment rate for the youth is averaging 27%.  Aside from the high unemployment rate, there is the mysterious fact that there is an inverse relationship between education level and employment.  This means that the most highly educated young people are also the most likely to be unemployed.  Of those with jobs, many find themselves working in the public sector instead of the private sector where market forces would spur innovation and growth and thus create more jobs.  Across the region, the labor force participation rate is at 48%, compare that to 63.6% in the US, our lowest level since 1981.  

Over a year later we have seen significant changes in the mid-east (except Syria where the fighting continues) but only time will tell what results the arab spring ushered in.  One thing is certain, the oil keeps pumping and the money keeps flowing.

I know it is horrible to think about, but every time we fill up at the pump, we are sending our dollars overseas to strengthen these regimes and prolong the behavior that has kept them in power for so long.  It is a brutal reality, but it is the world we live in.  Until we develop a clean and renewable source of power, our money is going to chase the fossil fuels that power our lives.  But when you follow the money to the source, it isn’t a very pretty picture at all.

In His Own Words . . .

Near the polar cap, waterways are opening that we could not have imagined a few years ago, rewriting the geopolitical map of the world.  Rising sea levels could lead to mass migrations similar to what we have seen in Pakistan’s recent flooding.  Climate shifts could drastically reduce the arable land [available that is] needed to feed a burgeoning population as we have seen in parts of Africa.  As glaciers melt and shrink at a faster rate, crucial water supplies may diminish further in parts of Asia.  This impending scarcity of resources compounded by an influx of refugees if coastal lands disappear not only could produce a humanitarian crisis, but also could generate conditions that could lead to failed states and make populations more vulnerable to radicalization.  These troubling challenges highlight the systemic implications – and multiple-order effects – inherent in energy security and climate change.

Admiral Mike Mullen
Chairman of the Joint Chiefs of Staff
Joint Forces Quarterly, January 2011