Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems

What is behind the Russia/Ukraine problem? It seems to me that what we are seeing is Russia’s attempt to fix a two-part problem:

  1. Some oil and gas exporters, including Russia, are not receiving enough oil and gas revenue to meet their needs. They are not able to collect enough taxes to provide the services they have promised to their citizens, plus allow the amount of reinvestment that is needed to maintain production. Russia is starting to experience economic contraction because of the low revenue situation. This situation very closely related similar problems I have written about  previously. In one post I talked about major independent oil companies not producing enough profit to provide the revenue needed for reinvestment, and because of this, cutting back on new investment. In another, I talked about the problem of too low US natural gas sales prices, relative to the cost of extraction.
  2. Some oil and gas importers, including Ukraine, are not using their imported oil and gas in productive enough ways that they are able to afford to pay the market price for oil and gas. Russia gave Ukraine a lower natural gas price because some of Russia’s pipelines cross Ukraine, and Ukraine must maintain the pipeline. But even with this lower natural gas price, Ukraine is behind on its payments to Russia.

If a person thinks about the situation, it looks a lot like a situation where the world is reaching limits on oil and gas production. The marginal producers (including Russia) are being pushed out, at the same time that the marginal consumers (including Ukraine) are being pushed out.

Russia is trying to fix this situation, as best it can. One part of its approach is to make certain that Ukraine will in fact pay at least the European market price for natural gas. To do this, Russia will make Ukraine prepay for its natural gas; otherwise it will cut off its gas supply. Russia is also looking for new customers who can afford to pay higher prices  for natural gas. In particular, Russia is working on a contract to sell LNG to China, quite possibly reducing the amount of natural gas it has available to sell to Europe. Russia is also signing a $10 billion contract with Iran in which it promises to construct new hydroelectric and thermal energy plants in Iran, in return for oil exports from Iran. This contract will increase the amount of oil Russia has to sell, and will increase the oil available on the world market. Russia’s plan will do an end run around US and European sanctions.

Gradually, or perhaps not so gradually, Russia’s exports are being redirected to those who can afford to pay higher prices. European Union purchases of natural gas imports have declined since 2008, presumably because they are having difficulty affording the current price of gas, so they are being relied on less for future sales.

The Russian approach seems to include building a new axis of power, including Russia, China, Iran and perhaps other countries. This new axis of power may threaten the US dollar’s reserve currency status. With the dollar as reserve currency, the US has been able to buy far more goods from other countries than it sells to others. Putting an end to the US dollar as reserve currency would leave more and oil and gas for other countries. If purchases by the US are cut back, it will leave more oil and gas for other countries. The danger is that prices will drop too low because of the drop in US demand, leading to lower production. It this should happen, everyone might lose out.

I am doubtful that Russia’s approach to fixing its problems will work. But if Russia is “between a rock and a hard place,” I can understand its willingness to try something very different. It now has more power than it has had in the past because of its oil and gas exports, and is willing to use that power.

The US/European approach to this problem is to loan Ukraine $17 billion to pay for past natural gas bills. The hope is that with this loan, Ukraine will be able to make changes that will allow it to afford future natural gas bills. There is also the hope that the United States can step in with large natural gas exports to Europe and Ukraine. In addition, the US and Europe are trying to impose sanctions on Russia.

I find it very difficult to believe that the US/European approach will work. The idea that the United States can start exporting huge amounts of natural gas to Europe in the near future borders on the bizarre. There are many hurdles that would need to be overcome for this to happen. Installing LNG export facilities is among the least of these hurdles.

In fact, the West badly needs both the oil and gas that Russia is producing, so it really is in a very precarious position. If Russia cuts off exports, or if Russia is forced to cut off exports because of financial difficulties, both the US and Europe will suffer. It is clear that Europe will suffer because of its dependence on pipeline exports of oil and gas from Russia. But the US will suffer as well, because the US is tied closely to Europe by financial ties, and by import and export arrangements with Europe.

Furthermore, the US/European approach involves a great deal of new debt, in an attempt to fix an inherent inability of the Ukrainian economy to afford high energy prices. Without a huge transformation, Ukraine will be in even more financial difficulty when it comes time to pay back the new debt–it will need make debt payments at the same time that it needs to pay for more expensive future natural gas. More debt doesn’t necessarily fix the situation; it may make it worse.

The US powers that be do not understand what Russia (and the world) is up against, so the policies they propose are likely to make the situation worse, rather than better.

Continue reading

Posted in Alternatives to Oil, Financial Implications, News Related Post | Tagged , , , , | 768 Comments

Eight Energy Myths Explained

Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common mis-beliefs,  coming from a variety of energy perspectives. I will start with a recent myth, and then discuss some longer-standing ones.

Myth 1. The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs.

The real story is that producers want to sell their crude oil at as high a price as possible. If they have a choice of refineries A, B, and C in this country to sell their crude oil to, the maximum amount they can receive for their oil is limited by the price these refineries are paying, less the cost of shipping the oil to these refineries.

If it suddenly becomes possible to sell crude oil to refineries elsewhere, the possibility arises that a higher price will be available in another country. Refineries are optimized for a particular type of crude. If, for example, refineries in Europe are short of light, sweet crude because such oil from Libya is mostly still unavailable, a European refinery might be willing to pay a higher price for crude oil from the Bakken (which also produces light sweet, crude) than a refinery in this country. Even with shipping costs, an oil producer might be able to make a bigger profit on its oil sold outside of the US than sold within the US.

The US consumed 18.9 million barrels a day of petroleum products during 2013. In order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013 (netting exported oil products against imported crude oil). Thus, the US is, and will likely continue to be, a major oil crude oil importer.

If production and consumption remain at a constant level, adding crude oil exports would require adding crude oil imports as well. These crude oil imports might be of a different kind of oil than that that is exported–quite possibly sour, heavy crude instead of sweet, light crude. Or perhaps US refineries specializing in light, sweet crude will be forced to raise their purchase prices, to match world crude oil prices for that type of product.

The reason exports of crude oil make sense from an oil producer’s point of view is that they stand to make more money by exporting their crude to overseas refineries that will pay more. How this will work out in the end is unclear. If US refiners of light, sweet crude are forced to raise the prices they pay for oil, and the selling price of US oil products doesn’t rise to compensate, then more US refiners of light, sweet crude will go out of business, fixing a likely world oversupply of such refiners. Or perhaps prices of US finished products will rise, reflecting the fact that the US has to some extent in the past received a bargain (related to the gap between European Brent and US WTI oil prices), relative to world prices. In this case US consumers will end up paying more.

The one thing that is very clear is that the desire to ship crude oil abroad does not reflect too much total crude oil being produced in the United States. At most, what it means is an overabundance of refineries, worldwide, adapted to light, sweet crude. This happens because over the years, the world’s oil mix has been generally changing to heavier, sourer types of oil. Perhaps if there is more oil from shale formations, the mix will start to change back again. This is a very big “if,” however. The media tend to overplay the possibilities of such extraction as well.

Myth 2. The economy doesn’t really need very much energy.

Continue reading

Posted in Alternatives to Oil, Energy policy | Tagged , , , , , | 561 Comments

Oil Limits and Climate Change – How They Fit Together

We hear a lot about climate change, especially now that the Intergovernmental Panel on Climate Change (IPCC) has recently published another report. At the same time, oil is reaching limits, and this has an effect as well. How do the two issues fit together?

In simplest terms, what the situation means to me is that the “low scenario,” which the IPCC calls “RCP2.6,” is closest to what we can expect in terms of man-made carbon emissions. Thus, the most reasonable scenario, based on their modeling, would seem to be the purple bar that continues to rise for the next twenty years or so and then is close to horizontal.

Figure 1. Summary Climate Change Exhibit from new  IPCC Report.

Figure 1. Summary global average surface temperature change exhibit from new IPCC Report.

I come to this conclusion by looking at the tables of anthropogenic carbon emission shown in Annex II of the report. According to IPCC data, the four modeled scenarios have emissions indicated in Figure 2.

Figure 2. Total anthropogenic carbon emissions modeled for in the scenarios selected by the IPCC, based on data from Table All 2.a in Annex II.

Figure 2. Total anthropogenic carbon emissions modeled for in the scenarios selected by the IPCC, based on data from Table All 2.a in Annex II.

Continue reading

Posted in Energy policy, Financial Implications | Tagged , , , , , , | 826 Comments

The Absurdity of US Natural Gas Exports

Quiz:

1. How much natural gas is the United States currently extracting?

(a) Barely enough to meet its own needs
(b) Enough to allow lots of exports
(c) Enough to allow a bit of exports
(d) The United States is a natural gas importer

Answer: (d) The United States is a natural gas importer, and has been for many years. The EIA is forecasting that by 2017, we will finally be able to meet our own natural gas needs.

Figure 1. US Natural Gas recent history and forecast, based on EIA's Annual Energy Outlook 2014 Early Release Overview

Figure 1. US Natural Gas recent history and forecast, based on EIA’s Annual Energy Outlook 2014 Early Release Overview

In fact, this last year, with a cold winter, we have had a problem with excessively drawing down amounts in storage.

Figure 2. US EIA's chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

Figure 2. US EIA’s chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

There is even discussion that at the low level in storage and current rates of production, it may not be possible to fully replace the natural gas in storage before next fall. Continue reading

Posted in Alternatives to Oil, Financial Implications | Tagged , , | 581 Comments

Oil Limits and the Economy: One Story, Not Two

The two big stories of our day are

(1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession.

(2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change.

While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously. The economy is the coordinating system that ties together all available resources, as well as the users of these resources. It does this almost magically, by figuring out what prices are needed to keep the system in balance—how much materials of which types are needed, given what consumers can afford to pay.

The catch is that the economic system is not infinitely flexible. It needs to grow, to have enough funds to (sort of) pay back debt with interest and to make good on all the promises that have been made, such as Social Security.

Energy use is very closely tied to economic growth. When energy consumption becomes slow-growing (or high-priced—which  is closely tied to slow-growing), it pulls back on economic growth. Job growth becomes more difficult, and governments find it difficult to get enough funding through tax revenue. This is the situation we have been experiencing for the last several years. Continue reading

Posted in Book draft, Financial Implications, Introductory Post | Tagged , , , | 489 Comments