“What we have here is a failure to communicate.” That’s what the warden says to Paul Newman in the movie Cool Hand Luke, right after he knocks him into a ditch. The oil and gas industry has its own failure to communicate and the longer prices bump along the bottom, the worse it seems to be getting.
Much of the communication problem centers on whether the world still needs oil and gas and how long that need will last. The additional source of confusion is what low oil prices have to do with the future energy mix. The best evidence of that failure to communicate can be seen in the comparison between President Obama’s State of the Union address on January 12th and ExxonMobil’s projections on energy use released less than two weeks later. Their perspective on the role that oil plays in our economy – no, actually in the lives of people all over the globe – is so radically different that there is no common ground.
In the President’s annual address to Congress, one of the big applause lines came when he pointed out that the U.S. has reduced oil imports by 60 percent under his administration and, “gas under $2 a gallon ain’t bad either.” Both Democrats and Republicans cheered for that.
Then he continued, “Rather than subsidize the past, we should invest in the future, especially in communities that rely on fossil fuels. We do them no favor when we don’t show them where the trends are going.” Related: Russian-OPEC Production Cut Remains A Long Shot
What trend? The political and diplomatic efforts to address global warming. But the President missed, or chose not to recognize, another trend – the world is not decreasing its use of oil and gas; it is increasing it. That information was highlighted a couple of weeks later when the ExxonMobil analysis was released. That study looks ahead to the year 2040 and projects that fossil fuels will still provide 80 percent of the world’s energy need.
The Cliff Notes version of the analysis is that:
1. Undeveloped nations will become more developed,
2. Populations will grow (from 7.2 billion people worldwide today to nine billion in 2040), and
3. Global energy demand will increase by 25 percent. About a third of the energy used will come from oil. Natural gas will be the biggest winner, with consumption up by about 40 percent. Renewable energy use will increase substantially and coal will be the big loser. Related: LukOil Back In Iran As Russia’s Output Faces Decline
That is a changed landscape to be sure, and not the sort of change that should cause policymakers to think they can ignore any energy source to fuel world growth. Interestingly, one of the biggest changes predicted in the report has less to do with energy sources and more to do with using our energy more efficiently. Where the study predicts that world energy use will go up 25 percent, we could see twice that increase if we don’t adopt efficiency measures. To put it another way, we need to be aggressive in implementing efficiency measures or we may not have enough energy to meet growth demands.
Looking at one measure, light vehicles are predicted to use about 40 percent less fuel, not because we will all be driving electric cars, but because stingier gas-powered vehicles could get 45 miles per gallon.
To some extent, the difference between the State of the Union address and ExxonMobil’s vision of the future is a tale of two cities, Washington and Houston. One is driven by the optics of politics and the limitations of the legislative process. The other is driven by the realities of the marketplace and the simple realities of statistical analysis. But it also sounds like a tale of two planets – one world in which energy sources can be changed with a flip of a switch and one world where people and governments continue to act in their own best interests. Related: More Oil and Gas Bankruptcies Are Assured
So where is the common ground? How do we stop the massive failure to communicate? How about this:
• No one in the energy industry should believe that we live in a static economic model where oil continues to be king forever and there is no room for alternative energy sources. The costs of alternative energy will continue to decrease and the benefits of those sources under specific circumstances and for specific purposes will increase.
• Oil and gas aren’t going anywhere. Petroleum engineers and geologists entering college next year will work their entire careers exploring for hydrocarbons.
• While we are going through a historic down cycle in oil and gas, failure to plan for a future that includes those commodities risks shortages that could make the costs astronomical.
• Somewhat higher (and predictably stable) oil and gas prices help every part of the energy pie. Low prices are killing the oil and gas sector, but they are also making it impossible for renewables to thrive without subsidies.
• Incentives for efficiency promise to provide us with the greatest long-term bang for the buck.
• Government policies need to be grounded in the reality that fossil fuels are going to be with us for a long time to come and that renewables will take time to prove themselves. Policies need to reflect a mixed and balanced approach to the full array of energy sources, the “all of the above” policy that the Administration once talked about but never fully embraced. Let’s note that none of the Presidential candidates from either party are talking about a balanced energy policy either.
That approach is the only way to replace our failure to communicate with the type of public policy that transitions us into the future. To borrow from a guy who was pretty successful in communicating his message to the America people eight years ago, that would be “change we can believe in.”
By Ken Wells for Oilprice.com
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