Energy Policy in the U.S.: The Play of Conventional and Alternative Sources

Re-published from Dialogues, United States Association for Energy Economics 

By Jennifer Warren

With less than 100 days into a new administration, the Trump administration has indicated new directions in energy policy. A comprehensive vision of U.S. energy policy has not been articulated however. America’s energy landscape is dynamic and markets have considerable sway. The fundamentals of supply, demand, price and technological advances continue to push and pull the energy mix, shaping the amalgam that is U.S. energy. Notably, several key areas were emphasized on the campaign trail and contours of policy are echoing those pledges.

Conventional sources

The oil and gas industry was an obvious constituent that Trump wanted to support. The opening up of federal lands for more drilling was a campaign item. As an indication of support for the oil and gas industry, on January 24th, Trump signed a presidential memorandum that indicated movement on construction of the Keystone XL and Dakota Access pipelines. The $4.2 billion Rover pipeline, stretching from Pennsylvania to Ontario, was also advanced by the Federal Energy Regulatory Commission, where bottlenecks and economic impacts were stymieing the flow of natural gas.

As for policy directions and drilling on public lands, according to Amy Jaffe, executive director of Energy and Sustainability, University of California-Davis, “Trump has been direct in saying that he wants the oil and gas industry to be healthy and expand because it is important for the country.” She continues, “Drilling on public lands is a bit of red herring. Companies know where the resources are and where there is infrastructure in place, for example in the Permian or Marcellus.” The question she poses: “Do they want to drill on federal lands in other locations that lack infrastructure when you have this existing lower-48 resource base on private lands [via shale] all ready for the market.”

As mentioned in a recent natural gas article, the idea of a trade spat with Mexico isn’t a favorable development for U.S. natural gas producers, refiners or midstream firms. In the last several years, Mexico has increased its consumption of U.S. natural gas. A number of U.S. firms have added Mexico’s market to their business plans, a new opportunity that formerly did not exist. In an era with the potential for excess supply and ample capacity, export markets like Mexico have served as a relief valve, helping buoy various oil and gas industry players during a downturn that is turning upward. The U.S. oil and gas industry has evolved with technological change under the pressures of a competitive global market and holds a position of strength.

Relief to the coal industry is the other major pledge with policy implications. The Clean Power Plan (CPP) was a major policy measure that was expected to shape and refine energy consumption and power generation. The Energy Information Administration projects a 26% decline between 2015 and 2040 in coal production with CPP implementation. Without the CPP, they expect production to remain at 2015 levels.

cpp

Alternative energy

In conversation with Jaffe, she mentions that the majority of states are implementing the clean power plan because these clean energy initiatives were already in motion. She does not expect these states to reverse course. “Some utilities are moving away from coal because natural gas is cheaper, or because shareholders will not invest in coal generation,” she notes.

Additionally, more Fortune 500 companies are committed to using clean energy. The Googles and Walmarts are announcing to stakeholders that they intend to be 100% renewable by certain dates. “Therefore, as a firm, you have to be in a state that supports renewables,” she says.

There is a flip side, Jaffe refers to as a fault line, “But to have the renewables, there can be a problem if higher costs get kicked over to fixed income folks. The perception is that flush Google-type firms are benefiting from federal tax credits when they buy renewables, while some of the costs are borne in the overall rate base by regular, working people.” This is an example of the rise of the contention between the ‘elites versus the rest’ that has changed the political landscape of late. Jaffe suggests, “There maybe some temporary reprieve from electricity reform [under Trump], but that may wind up being more about the pace of change than the fact that change is coming.”

The climate change agenda is a broad and diffuse issue that has many arteries. In these initial days, and given the weight of other issues such as trade, security and economy, this item may not be a high priority for the administration. However, executive orders to roll back the Clean Power Plan, the Climate Action Plan and the Paris Agreement are said to be on the horizon.

Jaffe offers, “At UC Davis, we talk about “the three transportation revolutions” — automation, shared mobility and electrification. These technologies will come forward but not because of climate change policy. In both developing and developed countries, traffic congestion is a real problem. Firms like UPS and FedEx are using big data to save on fuel and labor costs, offers Jaffe. At UPS, after implementing computer-based route planning, they saved 100 million vehicle-miles traveled in the U.S. with that program. “If we were to cede [our advances in technology] to China, that would be a disaster for American jobs,” says Jaffe.

“It remains to be seen how automation and clean technology shakes out with respect to economic planning over this Administration,” observes Jaffe. “Politicization exists but energy technology and clean tech are important as a source of competitiveness in the U.S.,” says Jaffe. Advances in technology have implications for military applications, cyber security, electricity grid security, and the movement of goods inside the U.S. Further, notes Jaffe, the movements of goods in the U.S. has a major influence on the competitiveness of exports, and the competition of manufacturing versus importing foreign goods. Thus, policies that have knock-on effects need to be fully scored.

Looking Back to See Ahead

To catch up with recent writings, I’m posting two items that capture noteworthy trends in oil markets:

1) “U.S. Shale Gale: A Whale Of A Tale, And Permian Walkabout,” that speaks to U.S. producers’ activities in light of the new normal in pricing;  and

2) “Cartels, Sci-Tech And Breaking Bad: Oil Markets’ New Normal?” offering more scenarios possible in oil markets than answers.

The upcoming OPEC meeting may offer little new information, as the strategy to pursue market share, particularly for the Saudis and Gulf states, continues to manifest. Geopolitics in the Middle East are in a perilous status quo.

While often writing about oil markets and U.S. shale resources, the advances in renewables, infrastructure developments (including U.S. midstream), and other energy and resource developments are being studied and considered. A recent article about global infrastructure firm Fluor captures some of the diversity in energy that overlays the global map. An excerpt follows since this article will be inaccessible in a couple of days:

Natural gas demand is expected to grow by 30% between 2014 and 2025 and production will increase by almost 40%, notes an IHS study. This demand is driven by power generation and industrial users. With low natural gas prices and ample NGL supply, the American Chemistry Council expects investment of $135 billion in 211 projects; this estimate was upped from a February 2014 estimate of $100 billion and 148 distinct investments.[i]

Fluor is also involved in the highly technical work of nuclear power plants, including their decommissioning. Recently, the company acquired 98% ownership of a nascent nuclear technology called NuScale. Majority-owned by Fluor, NuScale Power, LLC is developing a new kind of nuclear plant considered a safer, scalable version of pressurized water reactor technology, designed with natural safety features.

A big bet, Fluor believes NuScale could revolutionize the nuclear power industry and offer a $400 billion-dollar market.[7] In two decades, the business could be ‘huge,’ especially with their exclusive rights to build the smaller-scale, modular units. These 50-megawatt (MW) units can be stacked, like six packs, creating a 300 MW plant or more scaled-up plant based on the need. A recent Wall Street Journal article mentioned how the West, and particularly the U.S., is being usurped by China and Russia in nuclear build expertise. However Fluor may capitalize on the trend regardless of who leads the effort given their global footprint and ability to scale nuclear energy in diverse and new ways.

U.S. Energy Supply Alters Benchmarks and Trade

The Dallas Committee on Foreign Relations recently posted the inaugural publication of its “Global Themes Forum,” an occasional series of articles, essays and thought pieces about topical global affairs issues. The first installment is a thought piece on global oil markets titled, “U.S. Energy Supply Alters Benchmarks and Trade Scenarios.” See the item listed January 27,2015.

And if the big picture isn’t of concern, a dive into global oil markets after the Saudi succession, or how consolidation in the U.S. energy industry is beginning, may be of interest.

1) “Post-Saudi Succession, Oil Markets Seeking An Elusive Equilibrium” here.

2) The Energy Transfer merger between “family” members: “Energy Transfer Merger Creates Second Largest MLP, Scale Economies” here.

Global Firm Flowserve Indicative of Resource and Infrastructure Trends

Flowserve Corp., a leading manufacturer and service provider of flow control systems, is poised to capture the resource-focused trends spanning the globe. As a global firm with a $9 billion capitalization, Flowserve is both geographically-diversified and diversified within energy infrastructure, water infrastructure and industrial sectors. The firm is poised to negotiate the dual-track energy developments in conventional and unconventional hydrocarbon trends as well as clean energy. Given population growth, resource-constraints, and climate change scenarios[i], their portfolio touches most of the underlying industrial processes that modern and modernizing societies require. bigstock_Crowded_Indian_Street_Scene_3775703

(The rest of the article can be viewed on Seeking Alpha for 30 days, when it will subsequently appear behind their paywall.)

 

[i] Warren, Jennifer (2012). Targeting the Future: Smarter, Cleaner Infrastructure Development Choices, Human and Social Dimensions of Climate Change, Prof. Netra Chhetri (Ed).