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Where Is The World's Safest Source Of Oil?

Alberta Premier Jason Kenney claimed…

Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Has The Movement For CO2 Controls Peaked?

The signs don’t look favorable for carbon dioxide emissions controls in the U.S. The Trump administra-tion along with much of the Republican party clearly do not believe in climate change in ways that comport with scientific consensus. As a result we should expect federal policy efforts to be directed elsewhere.

However, the new acting head of the Environmental Protection Agency, following Scott Pruitt's long anticipated departure, is Andrew Wheeler, former energy lobbyist. Interestingly he has conceded that the 2009 court decision that requires the EPA to regulate carbon dioxide emissions is “settled law.” How aggressively the agency interprets and ultimately enforces its mandate bears watching.

Looking at energy policy changes further north in Canada, populist Doug Ford, the new premier of On-tario, recently fired the province's chief scientist, eliminated the ministry of science and innovation and ended the provincial cap and trade market. If he were looking to align provincial energy policy with that of the Trump administration he could not have done better.

At a broader level, a report issued by the International Energy Agency (IEA) showed surprisingly that overall energy investment in 2017 declined 2% from the previous year. However investment in renewa-ble power fell by a more substantial 7% (from $318 down to $298 billion). Bloomberg's survey of in-vestment in clean energy (not the same definition as the IEA's) also declined by 1% in the first six months of 2018.

The decline in capital spending for new energy investments was featured in headlines in both instances. What wasn't emphasized was that the cost of renewables declined substantially (maybe by 15%) in 2017. And spending on energy efficiency rose to $236 billion (up 3%). Related: Is This The Next Global Leader In Ride Hailing Services?

Given our present energy mix this also suggests a continued, diminishing reliance on fossil fuel. And that shift is likely to continue. Coal fired power generating capacity is presently being displaced by nat-ural gas fired generation. Gas and renewables will then resume the fight for market share. The result should be advantageous both for the environment (less CO2) and for consumers (cheaper energy). But whether this is equally advantageous for energy investors remains to be seen.

Looking at future energy needs, developments in the electric vehicle market need to be considered. Most major car manufacturers have committed to producing electric vehicles within five years with some even eliminating entirely sale of internal combustion vehicles. Transportation accounts for about 70% of U.S. oil consumption.

We cannot predict the rate at which consumers adopt or the infrastructure evolves to accommodate electric vehicles. But this does suggest a probable increase in market penetration of electric vehicles. For oil and gasoline consumption this is a zero sum game.

We can consider this the great migration. The entire transportation sector is migrating from internal combustion to battery power. And as this occurs, at whatever pace, oil usage will inevitably be replaced by increased usage of electricity.

The incremental energy demand of the transportation sector on the electric grid is significant. An in-dustry taking this seriously would be expected to be in the midst of a large construction boom. In the U.S., only two nuclear plants are under construction and nothing else is scheduled. All other major in-cremental power generating facilities in planning or construction will be gas-fired or renewable. At the same time numerous coal-fired power plants will be retired.

Given the difficulty and expense of siting, planning and completing large coal-fired or nuclear facilities, we see little chance that the electric power generation industry will recommit to large, central station power generation. In addition the uncertain long term economics of wholesale power prices also war-rants caution with respect to capital expenditures of this type.

Interestingly, one of the ready sources of utility capital on a virtual global basis has been large pensions and sovereign wealth funds. Unfortunately for the electric utility industry, this group of previously will-ing investors are now being pressured to divest its coal and oil investments. Norway’s sovereign wealth fund, the largest in the world, has adopted a no-fossil fuel policy — ironic given that exploitation of Norway’s oil and gas resources made the fund possible. The Church of England recently joined the list of investors shunning fossil fuels—also ironic because the present Archbishop of Canterbury spent 11 years in the oil industry before joining the church. If more big funds succumb to this type of pressure, the number of potential buyers for energy securities declines and the cost of capital will likely rise. For investors this is typically seen as a negative. Related: Houston To Overtake Cushing As Key Hub

The bottom line? Politics aside the electric utility industry will continue to move in the direction of lower carbon emissions, especially since many state governments are pushing for decarbonization de-spite lack of Federal encouragement. The displacement of coal fired power generation by natural gas alone ensures that outcome even before considering the salutary environmental benefits of renewables. At the same time the electric utility industry will gradually enable electrification of vehicular transpor-tation, our so called great migration.

Powering a car battery with electricity from an old, unscrubbed coal fired power plant does little that is positive for the environment. But whether the acceptance of electric vehicles also encourages the more rapid adoption of cleaner sources of energy production remains to be seen.

But whatever the adoption rate, renewable energy costs continue to decline and the area attracts funds for research and development. Capital costs should be expected to decline for greener projects. Over time the correct ecological choice is also the correct economic choice.

By Leonard Hyman and Bill Tilles for Oilprice.com

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  • Myles Bennett Dyson on July 19 2018 said:
    Who cares if funds want to jeopardize people's retirements and play politics with the money? I would be very upset if liberals were playing politics and activism with my money.
  • John Scior on July 20 2018 said:
    I am not a Climate change denier. I do feel that the schemes that have been brought forth to De-carbonize our energy production are preponderously stupid , complex and naive. What happened to the Kyoto protocol ? When the time frame comes down to making actual reductions ( which are always set at some point way in the future ) signatory countries pull out because they realize the costs associated with making such changes would make their industries less globally competitive. Why not simply put a tax on coal tonnage or a direct tax on gasoline. Oh because any politician proposing such a simple idea would quickly be booted from office. So instead ideas put forth entail this cap and trade as if there is some natural amount that any electric company can emit but if they go over they purchase credits from tree-planters or recyclers in some third world emerging market or more likely from some fraudster selling bogus credits and laughing all the way to Brazil. Its an invisible tax that is more costly because energy companies have to go through a bureaucratic nightmare to prove compliance. Instead of wasting money trying to implement these ultimately failable schemes do this instead . 1 . where gas is being flared off, government funds mobile generators so the electricity generated can be fed to the grid ( thus eliminating waste and displacing other fossil fuel generation ) 2. Build electric monorail systems in major cities that are supplemented with gondola cable systems and electric buses. 3. Government directly invests money to put solar rooftops on as many rooftops in Florida and Arizona as possible ( other state too ) 4. Develop fourth or fifth generation Nuclear power plants that use fast breeder technology to utilize the remaining power available in unused uranium that is stranded at old nuclear sites ( killing the waste problem and adding a considerable supply of non CO2 emmitting power to the grid simultaneously ) In my opinion these actions would actually reduce the reliance on energy derived from CO2 sourced electricity generation and pave the way for broader adoption of electric vehicles. The added benefit would be the added national security our country could realize by not relying on foreign sources of oil. Also the money going over seas to fund terrorists or in the least totalitarian regimes would come down to a trickle and there would be less need for US intervention across the globe. ( PS that money could also stay in circulation within our own domestic economy ) The opponents to these ideas would be vast. It would include all the vested interests who currently profit from US reliance on foreign oil as well as the military industrial complex which Ike warned us about. The upside is worth the effort and is more efficient than having newly developed agencies who do nothing but hire lawyers and accountants to push pencil across paper on their desks all day.

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