By Nick Cunningham, a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice
President Donald Trump signed several executive orders this week intended to juice the American energy sector, calling for expedited environmental reviews and the advancement of the Keystone XL and Dakota Access Pipelines. He also is trying to erase any sign of climate change by scrubbing government websites of climate data and even any mention of the phrase. No doubt more directives will be forthcoming in the next few days, not to mention the regulatory actions his agencies – EPA and Interior chief among them – will take to remove all restrictions on oil and gas drilling once his nominees get into place.
The panoply of executive action on energy issues could help add new oil supply to the market. Take Dakota Access, for example. Supporters of major pipelines like Dakota Access (and Keystone XL for that matter) tend to criticize environmentalists for protesting the projects by arguing that oil will always find a way to market regardless if a specific pipeline is blocked or not. But that is simply not the case.
The Dakota Access Pipeline will carry at least 470,000 bpd of Bakken crude to existing pipelines in the Midwest, and ultimately to refineries along the Gulf Coast. But without the pipeline, oil producers in North Dakota have to sell their crude at a discount in order to entice refiners to buy less competitive oil that is shipped by rail or truck. Wood Mackenzie estimates that to move oil by rail adds $12 to the cost while shipping it via pipeline only adds $7 per barrel. With crude trading at $50 per barrel these days, the $5 difference is 10 percent of the price – not a trivial figure.
It is not a coincidence then that North Dakota oil output has declined roughly 200,000 bpd from a peak of 1.22 mb/d at the end of 2014. The absence of adequate pipeline capacity has helped trim the growth of the Bakken, and it has also deepened its losses since the market downturn over two years ago.
According to the Dakota Access website, the pipeline will “eliminate the need for 500 to 740 rail cars and/or more than 250 trucks needed to transport crude oil every day.” As a result, the Dakota Access Pipeline would not only add takeaway capacity for the Bakken, but it would also trim the transit costs, theoretically making the entire basin more economically viable. That would translate to more investment, higher rig counts, more drilling and ultimately increased oil production. This is why environmental groups, among other reasons, are trying to block construction.
Dakota Access is just one of President Trump’s expected initiatives to boost energy production. Others include scrapping regulations on methane, expediting (or gutting, depending on your point of view) the environmental review process for major infrastructure projects, opening up drilling on public lands, and auctioning off more offshore acreage in the Arctic, Atlantic and Gulf of Mexico.
In addition to these energy-specific measures, President Trump’s proposed border-adjustment tax would potentially have even larger ramifications. Eliminating the deductions that companies are allowed to take on their taxes from imports while making exports tax-free will ripple across much of the U.S. economy, and the energy sector is no exception.
The result could be a price premium of about 25 percent immediately for WTI relative to international benchmarks, according to Goldman Sachs, or $10 per barrel. Higher prices will attract global capital, which could boost oil production. Goldman Sachs estimates the border tax could lead to an increase in U.S. oil production by about 1.5 million barrels per day by 2018, twice as much as the investment bank’s forecast without the border tax.
While that seems great for U.S. oil producers, such a scenario would not play out in a vacuum. Higher U.S. output could push down global oil prices, just as the surge in shale caused a price meltdown in 2014, as Liam Denning of Bloomberg Gadfly argues. The appreciation of the U.S. dollar from President Trump’s “America First” economic/energy policies would also push down oil prices. The end result could be higher oil production, but also another market downturn because of oversupply.
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And aren’t we still in a rather severe glut? Or at least the last time I checked. (I can’t find any data that isn’t two years old.) It seems counter productive to increase production when there is a shortage of storage space for raw and refined product.
The glut has largely gone, storage inventories are returning to normal, but there is still a lot of excess production capacity out there. The recent rise in oil has led to a rush to get rigs back drilling, so its possible another glut could emerge very quickly, especially if there is cheating in OPEC (which is very likely). The Saudi’s and Russians will not allow US shale to displace their established markets.
sorry, the glut is not gone…supplies of oil and most products are running ahead of last year’s glutted level, with oil inventories around 35% higher than two years ago…
i write a report on that data weekly: http://focusonfracking.blogspot.com/
if OPEC & the Russians hold to their cuts, it would start taking global supplies down by 600,000 barrels per day…
I would certainly bow to your knowledge (your website is great, btw), but my understanding is that while US inventories are still very high, especially for distillates, the evidence worldwide is that there has been much less stockpiling on a global level – Saudi Arabia have reduced their inventories significantly. Of course it may be that the huge increase in storage capacity in China and elsewhere over the last few years is having an impact.
this post has global supply and demand figures and charts from OPEC and the IEA: http://focusonfracking.blogspot.com/2016/12/review-of-non-opec-oil-production-cuts.html
while we’re adding less to the glut now than early on, global supply has outstripped demand for 11 quarters in a row…
It also appears that new storage capacity is being added. All the data I have seen suggest that they can’t keep up with growing inventories however. I need to research it more, but it appears that some of this new capacity has been achieved by reducing the safety margins for storage and over-filling the containers.
The tep-co tank-farm disaster comes to mind.
There were reports from a year or so ago that due to the glut oil was basically being stored in tankers still on the water that weren’t bothering to unload as there was nowhere to put it.
Any idea if that is still going on? Maybe the increased Chinese storage capacity PKun mentions has slowed that practice?
And as per the article, boosting supply isn’t going to do much good if there isn’t a demand for it. China seems to be taking a breather recently and I’m guessing that’s where much of the previous increase in demand was coming from a few years back.
And BTW I also liked your website after a quick once over.
A lot of this drilling going on is simply because these companies can, not because it’s really needed. Someone posted a video here of Wynona LaDuke making the argument against one of the pipelines on economic grounds which I found very good. That’s the way to beat these projects IMO. The environmental arguments are crucial as well but from a PR standpoint it’s too easy to start hippy punching if that’s the only argument against so the economic arguments very valuable.
Where are you getting this “glut is gone” information from? We have still have record or near-record amount of oil in the strategic reserve.
https://www.eia.gov/todayinenergy/detail.php?id=29692
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W
Strategic reserves are just one part of overall storage. Information worldwide is patchy, but the evidence suggests that reserves have been reducing worldwide over the last year – in Saudi Arabia for example. Certainly the ‘unofficial’ glut – such as the oil tankers parked off the Texas coast, is no longer an issue.
Meanwhile, think about the Paris agreement. Lowering oil prices decreases price pressure on political measures designed to reduce carbon emissions elsewhere. In Europe, where I think there is real compromise with the agreement, as well as lack of oil resources, this would mean counter measures. Some of them could result in commercial wars.
A critical one is increasing, by a lot, the cost of CO2 emissions. To increase the competitivity of low-carbon companies, production and imports of high-carbon footprint products should be punished accordingly, and that would mean products/services from China and the US amongst other countries. Those would be interpreted by Trump administration as commercial wars and counter measures would be adopted.
So it seems that energy issues, in this case by means of excess production and the environmental externalities, could trigger serious commercial wars. For me the question is how fast will this unfold.
‘President Trump’s proposed border-adjustment tax would potentially [produce] a price premium of about 25 percent immediately for WTI relative to international benchmarks.‘
Pure fantasy. The proposed border adjustment tax is highly speculative and unlikely to be passed in a form that would jack up US petroleum prices relative to the rest of world. This would hurt rather than boost US competitiveness — the whole point of the proposed scheme.
Markets see little chance of this happening. As I type, Mar 2017 West Texas Intermediate crude trades at $53.08 on the CME, a discount to Mar 2017 Brent crude at $55.21. These quotes are available at cmegroup.com.
Check out a long term (1983-present) chart of crude oil posted at mrci.com. Crude has stayed above $40 almost all the time in the past dozen years, except for brief excursions below $40 in early 2009 and early 2016. Just eyeballing the chart, the average for 2005-2016 looks to be around $75.
We can’t know what the true equilibrium price for crude oil is. But from the available evidence, it’s unlikely to be below $50. As us oil bulls are wont to say, “Shake the tree with XLE!” ;-)
“Equilibrium price”? So we are to take it that one is to believe that there is such a thing in a globalized commodity market as an “equilibrium price?”
If there is an equilibrium price, a market spends most of the time either overshooting or undershooting it.
Using the average price over a long period is as good as any way to guesstimate it. For the whole period shown in the mrci.com chart, the prices would need to be inflation adjusted to current dollars.
Maybe there’s an equilibrium price, but with so many positive feedback loops (financial markets, government intervention), it’s soooo unstable.
And a note about that other promise, jobs jobs jobs.
Lessee, 250 x 2 truck drivers, maybe a 2-day turnaround, so call it 2,000 jobs lost just there. Pipelines don’t require many people to maintain them; like oilfields, once built/developed they run pretty lean on humans. The jobs in developing/building usually require skill, so the jobs ‘created’ are mostly jobs lost elsewhere as experienced workers move from finished projects to new ones. Where, oh where, are these promised jobs?
Also remember that those trucks consume a huge amount of fuel, anywhere from 300-1000 gallons per run, so there will probably be a further drop in demand when those truckers lose their jobs due to the pipeline.
SNAPSHOT OF THE OIL STORY: A recent HSBC Bank report (below) warned private clients that the long-term plateau in worldwide oil production ends in 2017. This will be followed by production decline of 5-7% a year. Replacement by new production is doubtful. These shortfalls in oil production will have complex, serious economic impacts. In other words, fossil fuel supplies are much more limited than we’ve been told. Despite industry PR and a temporary supply glut of unconventional (mostly fracked) oil and gas, over 80% of the world’s conventional oil production has already peaked and is now in decline. Soon, unconventional oil supplies will no longer be able to hide shortfalls in conventional oil production.
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As oil prices go up the profitability of marginal fields and deposits also goes up, because markets. Once the price goes high enough other technologies become feasible as long as people can afford to buy oil. At some point it becomes expensive enough that Fischer Tropsch process manufacturing becomes cost effective. Soon after it becomes cost prohibitive to buy oil and alternative solutions will be found for the problems oil solves-fuel, lubricants, feedstocks for plastics, pesticides and fertilizers.
Plenty of new oil deposits in the Arctic, off the Atlantic coast, etc. Plenty of inventive types thinking up the next hydraulic fracturing, directed drilling and well stimulation techniques. Musk better hit mass production soon because oil isn’t going away.
In my view the oil price has been as closely tied to US geopolitical moves (multiple wars) as the ‘market’ (however defined) for most of the new century, it being understood that in these matters, the other big US drivers, the massive speculative bubble in prices tied to the Federal Reserve’s QE, or the equally impressive unwinding of these gigantic paper-oil positions in response to a deliberate glut, are tightly coordinated with the rest of US TPTB policy. Trump’s Cabinet just makes obvious what Obama’s Admin veiled only somewhat post-Bush, which is how oil, the MIC and Goldman (WS) among others, all work together ‘creating reality’ – and when progress as defined by the US power nexus is blocked, a new reality will be created, with a new (or refurbished) official narrative to go with it – like the ‘totally unpredictable’ Trump narrative he has done so much to cultivate, for instance.
Trump of course, hasn’t exactly hidden his utter contempt for the part of the world that produces by far the most conventional oil, not just Iraq and Iran, but clearly also the Saudis who, whatever else one might say, are to Trump after all alien life forms, Muslim, Arab, and irredeemably brown, people not worthy of owning their own resources. Trump also, and obviously, has professed, real or not, some interest in a ‘deal’ to keep the peace with Russia, also a huge producer of oil. So, there is an awful lot riding on Trumpian diplomacy, which, relations with Russia notwithstanding, he has promised will be naked US power fully unleashed. It is not unreasonable, then, to anticipate a major dislocation and re-shuffling of the deck to ensure “Islamic’ production comes down. I would add that Trump’s absurd view of China, if translated into action, will put a big dent in Chinese demand, which would make curtailing supply elsewhere even more important from the perspective of the US oil & money men, while the accompanying slowdown in the global and US economies would reverse Fed policy, end ‘strong dollar’ and also drive oil up in dollars. Gutting the EPA is a further clue re US intent – there are other ways to lower emissions, one of them being terminating growth elsewhere by force if ‘necessary’.
In other words, Trump’s ‘plan’ to put the US first (when did the US not put itself first?) in the world as he construes it as of now sports some profound contradictions, and until there is some modicum of reconciliation or clarification re policy-making, oil prices cannot be taken as stable in either direction.