Low Oil Prices Kill Energy Investment

Last week I published a blog article that discussed energy policy and suggested that an effective energy policy requires federally established minimum oil prices. Low and volatile oil prices destroy private investment in energy projects because returns become too uncertain to attract financing. As oil trades between $40 and $50 per barrel investment capacity for energy projects is disappearing. On Monday, the New York Times published a great article written by Jad Mouawad that articulates examples of supply destruction occurring from low and volatile oil prices.

If the U.S. wants to break its addiction to imported oil, setting and maintaining floor prices for oil, gas and coal must be a centerpiece of U.S. energy policy. Without minimum prices, “in the real world” investors won’t commit enough capital to domestic energy projects so that the U.S. can become energy independent. Domestic free market capital can’t compete with foreign government sponsored capital and energy policy needs to recognize this inconvenient truth.

Also, without minimum energy prices “green energy” will remain a mirage on the horizon, always there but always beyond our reach. Green energy is more expensive than government sponsored Middle Eastern oil and, without price supports, it won’t attract the necessary investment dollars to compete with cheap foreign oil. Green energy advocates fail to realize that government mandates aren’t the same thing as market solutions. Only minimum prices established through a variable surcharge will provide the market solutions that are needed to get green energy alternatives into the mainstream.

Below are some excerpts from Jad Mouawad’s New York Times article.

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets…

…But the project delays are likely to reduce future energy supplies…

…The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle…

…Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices…

…According to research analysts at the brokerage firm Raymond James, domestic drilling could drop by 41 percent next year as companies scale back…

…”We expect operators to significantly cut their activity in the coming weeks due to the holiday season, and many of these rigs will not come back to work,” the report said.

Comments

[longoil:]

Low oil prices encourage people to go back to their wasteful ways and turn a blind eye towards energy independence solutions. Alternative energy solutions are best implemented when energy prices are low, not high.

For example,
1) The manufacture of wind turbine require a great of conventional fossil fuels (oil, gas and coal) to excavate metal ores, refine them, cast them and mill them into turbine parts, transmission wire and transmission towers.

2) Oil is need to transport and install the turbines on the wind farms.

Bottom line, a great deal of conventional fossil fuels are needed to transition to any alternative energy source (wind, solar, nuclear, etc.)

Minimum crude oil pricing floor would certain help as would higher gasoline taxes.

2008 Dec 17 12:51 PM

[Freedoms Truth:]

Simple answer: An oil import tariff.
That supports domestic production and conservation.
And you can use the money to pay for alternative energy or better yet cut other taxes.

2008 Dec 17 02:10 PM

[kd2000:]

I don't buy that, if there is money to be made in alternative energy and enough subsidies from the Govt. for profits, it will be implemented. Remember that this is capitalist economy. Further middle east is getting busy to build Solar plants, because they want to sell energy in any form. Regardless of OIL price, if there are customers wanting to buy alternative energy, someone is going to make it. We are seeing the change of consumer sentiment going forward towards alternative energy in general. I won't buy a Hummer H2 if you sold it to me for half the price. If the new administration does not come up with sound energy policies to mitigate dependency on foreign OIL or fossil fuels, then it will be toast! Only way to create jobs in this economy is invest in alternative energy infrastucture! It is unavoidable now. Even Detroit's Big 3 are being pressured in that direction. Bottom line is now the consumer wants it! and consumer is King.

2008 Dec 17 03:00 PM

[Socialism c...:]

"Domestic free market capital can’t compete with foreign government sponsored capital and energy policy needs to recognize this inconvenient truth."

Spoken like a true communist...oh wait...NY Times...yeah, check!!

2008 Dec 17 05:32 PM

[fatcat:]

Gov. capital is always required for marginal projects....think rural roads that carry little traffic,but lots of produce,so folks can eat...if free markets were to decide,these roads would never be built until the fatcats begin to starve..

Longoil is right,the time to build is when oil is cheap...

2008 Dec 17 06:41 PM

[Tony Petroski:]

We're not "addicted to imported oil" anymore than we are "addicted" to cheap Chinese imports. Free men make the choices that they think suits them best at the time. Let's start the next boom with the help of "cheap oil" (I'm old enough to remember gasoline at 30 cents, so $2.00 a gallon is "cheap" in relative terms) and when we are wealthy again, we can fund all the luxuries like "green" ______fill in the blank.

2008 Dec 17 08:33 PM

[k45:]

Government manipulation of markets is inefficient and almost always wasteful and destructive. Look at the mess with the ethanol/corn fiasco.

If an industry cannot exist without government manipulation, then it should not exist.

The only thing worse than incompetent corporate management is letting politicians (almost all with no real world experience) manipulate the real world.

2008 Dec 18 08:37 AM

[smlcap:]

I think the low cost of oil will have less and less influence on alternative and clean energy sources. Bear in mind, we have waiting a president with a functioning brain. He's not an "oil man." He understands the value of jobs, energy independence, and the environment. If he caves in to low oil prices he knows it's good by to job creation, energy independence, and the environment. Not to mention national security. He is too bullish on alternative energy to let cheap oil sabatoge his plans.
I think traders avoiding alternative energy because of cheap oil, may be fooling themselves. Just my humble opinion.

2008 Dec 19 12:49 AM

[jepittman:]

The fixing of a minimum oil price would go a long way toward accomplishing the goals the author outlines. However the political problems of hiking gas prices on the public, which is how opponents would criticize it, make it unlikely to happen.

2008 Dec 20 11:07 PM