Tag Archives: energy

Why economy of scale failed?

Economy of scale is the advantage that firms obtained though increasing the scale of production or operation. Under economy of scale, enterprises have less product marginal cost and more outputs, thus there will be less fixed cost per unit because the fixed costs will be separated to more products. This advantage helps firms to improve efficiency and earn more profit.

However, this rule in economy is not fit in natural gas industry in US.

Reported in WSJ, A new breed of Energy Company is a hit with investors using a mantra long scorned in the oil-and-gas business: Small is beautiful. Actually many years ago, energy firms in US still believed in the economy of scale. At that time the Shale Boom happened thus gas extractors hunted for more and more large scale gas fields. They believed that more reserves and production they owned, the lower their marginal cost and more profits would they have. However, we all know what happened next, the huge amount of natural gas reduce the prices dramatically without much changes in marginal cost. Those big gas companies earned revenues that cannot even cover their marginal costs.

Now the investment opinion is reversed. Investors trust that the “quality” is more important than “sheer number”. This is to say, they gave up the old believes of economy of scale, now the cost of certain gas extractor is more notable. “It’s quality over quantity. We don’t have one million acres and we don’t strive to have one million acres,” says Daniel Rice IV, the 33-year-old chief executive of Rice Energy Inc.

The good news is that US government is preparing for its natural gas export terminals. According to WSJ, the Obama administration’s approval of a seventh application to export natural gas. Some lawmakers agreed with such a decision because the domestic natural gas companies are hungering for increasing in natural gas prices. The exportation can decrease the domestic supply thus raise the prices. Others who disagree this decision said that some jobs could be affected, also the domestic electricity price could also raise.

The reason why economy of scale failed in this market is that supply exceeded demand, so the effective choice for gas companies is to reduce their supply. Reported in WSJ, natural-gas prices on Thursday posted their biggest one-day gain in two months after a smaller-than-expected increase in U.S. inventories reignited fears that supplies are too low. This fear was caused by two reasons: first after this long winter, the gas supplies appeared to be scarce; second the export plan made gas supplies to be less than expected.

It’s essential for those firms to find a way to earn profits and make their business sustainable. We can wait to what will happen in the future about this industry.

The Foil to Russian Energy Stranglehold (Part 2)

As mentioned in my earlier post, Russia’s foreign policy strength relies on its control of the natural gas that supplies Europe.  Unfortunately, this control allows for Russia to exert their influence and will over many issues, as seen with Crimea.  European fracking has the ability to change the landscape of political power between Europe and Russia.  Germany is one of the largest importers of Russian gas and is struggling with rising energy prices, making it significantly difficult for them to wane themselves off of Russian energy.  Where Germany is struggling with moving towards shale exploration and extraction, Poland is embracing fracking with open arms.  This past month, the Prime Minister of Poland signed a tax freeze on special taxes that used to be in place on the shale industry.  Both Britain and Poland are the leading proponents to allow for fracking.  The EU recently released guidelines on fracking instead of banning it, which is favorable for England and Poland in their hopes to employ fracking.

While I believe that fracking offers the European countries a way to reduce their reliance on Russian gas, there are many other factors that the EU and countries needs to take into consideration.  The projected reserves for shale gas and oil is often seen as an imperfect measure.  Poland’s project shale reserves have recently been revised significantly downward.  Many of the companies that Poland awarded exploration permits have abandoned Poland due to exploration and extraction not being commercially viable.  I believe though that these companies will soon be back.  The increasing natural gas prices due to global warming and Russian aggression will soon raise the price high enough that Poland’s shale reserves will become economically viable.  Another issue that many opponents of fracking have in Europe is that it will ruin the environment and destroy the English countryside.  Unfortunately, this again becomes a question of how much people value the environment.  How high will natural gas prices have to rise before the EU gives the green light to begin fracking.

Shale gas, while not environmentally friendly, looks to be the next global energy boom.  As prices in Europe continue to rise, it makes sense that Europe would look to take advantage of the large shale reserves that are present in Europe.  Africa looks to be the next continent to look towards shale energy with its large South African reserves, projected at 390 trillion cubic feet.  At this point, I believe that African shale extraction and exploration will come about more quickly than Europe due to the low regulation in Africa.  As of now, it looks like natural gas will be the next big energy supplier until renewable, green energies become more cost efficient.  The ability for Europe to become less reliant on Russia is extremely important for energy security in the future.  Unfortunately, economists project that it will take 4 years to a decade once for Europe’s shale boom to reach the same level as the US.  It took the US 25 years to reach the shale energy boom that we are now experiencing.  With the innovations that the US has come across with fracking, I believe that it will take Europe and Africa a lot less time to reach the shale boom.  Once Europe can stop relying on Russia for natural gas, it will be free of Russian influence through Gazprom.

The Foil to Russia’s Energy Stranglehold (Part 1)

The biggest global issue so far this year just may be Crimea’s vote to secede from Ukraine and the following annexation of Crimea by Russia.  The large global powers of the United States and European Union have been unable to stand up to Russia mainly because Russia supplies Europe  with the majority of their natural gas.  The problem with natural gas is that it is difficult and costly to transport and store.  While the US is on pace to become a net exporter, current regulations prohibit the US from exporting large quantities of natural gas even though the supply of natural gas is set to outpace demand in the US in the near future.  Like the US boom in energy production, Europe also has the potential to follow in the US steps.  Europe, like the US, have large reserves of shale gas below England and continental Europe.  While its projected reserves are less than the US, 470 trillion cubic feet vs 567 trillion cubic feet, it could still power a majority of Europe for decades.  While Europe’s shale reserves could relieve Europe of Russia’s stranglehold, its been very difficult for governments to allow for exploration and extraction.  Many of the national governments want to begin fracking, but many local governments have stalled the implementation of these policies.  The policy implementation issues are exemplified in Germany and Poland.

Germany is a country that is caught in a vice right now.  It relies on Russian natural gas for a third of its energy usage and at the same time, they are beginning to phase out nuclear energy and trying to shift towards renewable green energy.  While Germany has seen a large increase in green energy, it is still too expensive and recently Germany has reduced their ambitious plan of having green energy supply 35% of energy usage by 2020.  Many opponents want the German government to look at more renewable energy sources instead of moving towards fracking which I just don’t see as a viable option.  Renewable energy is still too costly and it would increase energy prices for consumers which could lead to voters wanting to shift back to Russian gas which is significantly cheaper.  One potential solution could lead to Germany building more storage containers for liquified natural gas, allowing for more natural gas imports from the United States, Qatar and other countries.  One of the main problems I have with this is that this relies on other countries policies.  As mentioned above, the US would have to remove regulations prohibiting large scale exportation of natural gas before it could export to Germany.  Opponents of fracking believe that it is out of step with Germany’s current “green revolution”.  Unfortunately, Germany’s “green revolution” hasn’t necessarily been successful.  Energy prices are rising in Germany and one of its largest “success” stories is solar energy, which only accounts for 5% of Germany’s energy usage.  Germany has also built more coal power plants in the past few years, further illustrating their shift towards providing cheap energy instead of clean energy.  My next post will focus on Poland and the growth of the shale boom and how it will change Europe and Russian interactions.

(revised) US’s outlook for Natural gas exporting

The current conflict in Ukraine is attracting a lot attention. Weeks ago, in order to against the counter force from EU countries, Mr. Putin played his trump card: raise the natural gas price in Ukraine. As a big country that riches in all kinds of natural resources especially energy, Russia has been holding the pipelines that transfer natural gas into EU and making the dominate strategy in this game. It is reported that more than 30% of gas in EU is provided by Russia.

So far the west have threated to commit sanctions on Russia’s action of occupying the Crimea region, however due to the problem of natural gas, those commitments are more like to be non-credible threatens. The head countries in EU like UK and German are bounded by such a concern, and the graph below from NYT can shows that major buyers of the Gazprom – Russia’s largest state-owned natural gas company.

0305-for-webGAS-artboard_1

We can see that German and Britain are in the list. Actually according to this article in WSJ, Six countries in Europe import 100% of their gas from Russia, and an additional seven rely on it for at least half. It is beyond doubt that Russia has its considerable influence on the attitudes of the EU countries on this affair. U.K. Foreign Secretary William Hague said European nations may need to “recast their approach” to Russian energy purchases if the crisis isn’t resolved.

Also reported in WSJ, Obama’s government is taking measures to curb the Russia’s stranglehold over EU’s natural gas supply. US is currently one of the biggest natural gas production nations in the world due to one of its most advancing tech in this field names fracking. The strategy is increasing natural gas exporting to EU from US thus undercut natural gas imported from Russia. Compare to Russia, US has big cost advantage. As the graph from BP’s official site showed below, natural gas price keeps falling over recent years in North America. The price in US is far lower than that of Asia and Europe.

In this strategy of US, big oil and gas production firms like ExxonMobil benefit a lot from it, while environmentalists and small manufacturing companies strongly oppose such a claim. In my point of view, it is unstoppable for US government to apply this strategy.

There are several reasons why US didn’t doing so in the past:

1, Exporting more natural gas will increase the price of it in US. Currently the natural gas price in US is almost 1/5 of that in Japan, which is a big advantage for US manufacturing industries that rely heavily on gas as raw material. More export means less gas available in US, and the price will likely rise.

2, Protecting domestic natural resources and environment. Natural gas is a crucial strategic resource that its export needs to be limited. Also the large-scale exploiting of gas can cause severe environment problem.

3, Technology limitation. Since the gas exploiting technology in the past is not so advanced, the available gas reserves were bounded. People were afraid of gas shortage once they export more natural gas to foreign countries.

However, the current situations are changed dramatically. So it’s a good time for US to develop its gas export industry for several reasons:

1, Boom in natural gas reserves. Thanks to the new tech named “fracking”, now there are more gas available underground that can be exploited and meet the exporting need.

2, Increase domestic gas price. Because of the increase in gas reserves, now the prices are too low to let gas production firms making profits. Economically, it is needed to increase export to raise domestic prices and develop gas transmission infrastructures.

3, Curbing Russia’s power over EU. The political pressure in Ukraine is the main push force for US’s decision of increasing gas export.

Overall, the US strategy is a good news for the reason that it may help a lot to the establishment of the global natural gas market, which will benefit the people around the world and accelerate the process of clear energy movement.

 

Effects of Russian Intervention in Ukraine

As everyone knows, Russia recently intervened in the Crimean province of Ukraine in order to protect the Russian ethnic majority there from the new pro-western Prime Minister.  Politically, this has created a big crisis due to Russia violating Ukrainian sovereignty.  The US and EU have been forced to toe the line between all out confrontation with Russia and supporting Ukraine through any means possible.  While the political landscape is a complete mess, the economic repercussions aren’t any better.  The Ukraine hryvnia was down .5% against the dollar today while the Russian stock market has been down 22.7% and the Ruble is down 9.9%, the second weakest currency against the dollar of the 24 emerging market currencies.  Citigroup analysts have dropped Russia’s 2014 growth forecast for GDP from 2.9% to 1%.  The effects of the Ukrainian/Russian crisis has been felt in other emerging markets and developed markets as well.  Airlines have cut earnings by 5% due to raising oil prices and a slow down in emerging markets due to the Ukrainian Crisis.  The movement of Russian troops into the Crimean peninsula has also caused the price of Natural gas in Europe to increases.  Russia’s control over the price of natural gas in Europe has the potential to harm the economic comeback.  Right now, the EU is dependent on Russia for over a quarter of their natural gas.  If Russia cut off gas flowing through Ukraine, it would effect 14% of European gas consumption.  The potential energy problem is further exacerbated by Germany’s shift to green energy.  Germany recently issued a moratorium on new drilling which will make it even more reliant on Russian gas.  Poland, which has a strong fracking industry, relies on Russia for 2/3’s of Poland’s gas.  The Polish Prime Minister recently stated that Poland plans on diversifying their energy to make it more difficult for Russia to influence Europe.  Unfortunately, I don’t see Europe being able to diversify their energy quickly enough.  Russia will have a stranglehold on Europe until they are able to become less reliant on Russian gas.

The EU is not completely helpless against Russia though.  The EU has a three-stage plan in the works to penalize Russia.  The first is to suspend trade and visa liberalization.  I believe that this is the best course of action over military action because 4 out of 5 of their import and export partners are either in the EU or the US.  If the EU and US apply sanctions to Russia, then it would be logical that their allies like Japan would apply sanctions as well.  At the end of the day, I don’t see the EU apply sanctions or Russia cutting off Ukraine and EU oil supply because it would throw both of their economies into crisis.  After the sovereign debt crisis, I don’t see EU risking a rise in interest rates due to a drop in trade with Russia.  If the global economy wasn’t still recovering and the US could supplement Europe’s need for natural gas, I could see the EU and US favoring a tough stance, but now, I don’t see anything changing.

US’s outlook for Natural gas exporting

The conflict in Ukraine is one of the current hot topics. Several days ago, in order to weak the counter force from EU countries, Putin played his trump card: raise the natural gas price in Ukraine. As a big country that riches in all kinds of natural resources especially energy, Russia has been holding the pipelines that transfer natural gas into EU and making the later alter strategy in this game.

So far the west have threated to commit sanctions on Russia’s action of occupying the Crimea region, however due to the problem of natural gas, those commitments are more like to be non-credible threatens. The head countries in EU like UK and German are bounded by such a concern, and the graph below from NYT can shows that major buyers of the Gazprom – Russia’s largest state-owned natural gas company.

0305-for-webGAS-artboard_1

We can see that German and Britain are in the list. Actually according to this article in WSJ, Six countries in Europe import 100% of their gas from Russia, and an additional seven rely on it for at least half. It is beyond doubt that Russia has its considerable influence on the attitudes of the EU countries on this affair. U.K. Foreign Secretary William Hague said European nations may need to “recast their approach” to Russian energy purchases if the crisis isn’t resolved.

Also reported in WSJ, Obama’s government is taking measures to curb the Russia’s stranglehold over EU’s natural gas supply. US is currently one of the biggest natural gas production nations in the world due to one of its most advancing tech in this field names fracking. The strategy is increasing natural gas exporting to EU from US thus undercut natural gas imported from Russia. Compare to Russia, US has big cost advantage. As the graph from BP’s official site showed below, natural gas price keeps falling over recent years in North America. The price in US is far lower than that of Asia and Europe.

In this strategy of US, big oil and gas production firms like ExxonMobil benefit a lot from it, while environmentalists and small natural gas companies strongly oppose such a claim. In my point of view, it is unstoppable for US government to apply this strategy not only because it can set a restriction on Russia, but also it is a good opportunity to develop natural gas exporting industrial, which is just on its start-up.

Overall, the US strategy is a good news for the reason that it may help a lot to the establishment of the global natural gas market, which will benefit the people around the world and accelerate the process of clear energy movement. I hope that the US government can take this chance to do something really helpful for the economy, but not just a change to strike its main opponent.

Tesla Shifts into High Gear

With stock price surging 16 percent in a day, Tesla wins back the spotlights from all media on Tuesday. Ever since last week when Tesla reported much strong than expected profits and forecast it will sell 55% more vehicles than last year, its stock price has been soaring like crazy. After a Wall Street analyst told investors that Tesla could shake up the electric utility sector as well as the auto industry on the same day Consumer Reports named the Model S its top pick of this year’s cars, the stock price immediately spiked up by $34.65 to close at $252.30 on Tuesday. With the record high stock price, Tesla is a $30 billion company now.tesla

Tesla Motors Inc. might be on the verge of disrupting two industries, warranting a share price of $320, says Morgan Stanley analyst Adam Jonas, in a note to investors released Tuesday. This new share price target is more than doubling the last one that was $153, a number astonishing already. And there still potential of quadrupling this number in the future.

What’s driving all these? The expectations from two trillion-dollar industries: automotive and energy. It’s no news that Tesla is challenging every auto maker on the planet; now the warrior is preparing to take the energy leaders: very soon, Tesla is going to announce plans to build the world’s largest battery factory in the U.S. “We’re talking about something comparable to all lithium ion production in the world, in one factory,” said Elon Musk.

The factory will produce endless supply of lithium-ion battery pack, not only for Tesla vehicles, but also for every home and business. Such low cost energy storage solution will completely rewrite the game rules of its adjacent industries, for example, the electric power industry. Currently the electric companies charges more during peak hours. With Tesla’s battery pack, people will be able to avoid this extra cost. And this is nothing but a tip of the iceberg.

“Might we one day look back at Tesla’s humble beginnings as simply a car maker much as Amazon began as a book seller?” in Morgan Stanley’s report, it asks.

Indeed we might. One has to admit that Elon Musk has a pair of eagle eyes and a Jedi mind. From e-commerce to automotive, clean energy, mass-transportation and space exploration, this flamboyant entrepreneur only sets his foot on the most lucrative industries in the most disruptive way. With a track record of successful delivering on what he promised, Musk might actually create another “Tunguska Explosion” with Tesla.

Drill Baby Drill: Addressing Income Mobility With Energy Production

Alright – so drilling isn’t the main idea I’m diving at.  But Sarah Palin’s famous catch phrase excellently captures the relevance of energy production to income mobility and economic growth.  Specifically, as economies continue to recover, energy demand is expected to increase.  The energy sector will accordingly see an increased demand for labor.  Importantly, this labor demand will primarily be for high-wage jobs (as energy production requires a lot of skilled labor).  As more people get these high-wage jobs, aggregate demand increases.  In this way, the energy sector represents a positive feedback loop through which policymakers can fuel economic recovery.  By promoting careers in the energy sector, governments can fuel aggregate demand, increasing the need for energy sector jobs and initiating a very beneficial cycle.

According to the International Energy Agency (IEA), worldwide oil demand is expected to grow 1.4% faster in 2014 than in 2013.  Similar growth rates are expected to apply to the United States, which has already seen a huge boom in oil demand and production; in 2013, the crude oil market grew by 15% in the United States, representing the biggest growth in crude oil demand in any country for the last two decades.  So where is all this new demand coming from?  According to the IEA, this demand growth is driven by economic recovery worldwide.  As businesses start to rev up production, energy demand is skyrocketing.

For American citizens, this increasing demand for oil represents a fantastic opportunity for economic mobility.  In their annual rankings of millionaires throughout the United States, Phoenix Marketing International identified North Dakota as the state with the highest growth in millionaires relative to population size.  In 2013 alone, South Dakota jumped 14 spots, from 43rd to 29th.  Granted, the North Dakotan millionaire is not your typical “West Egg” entrepreneur, as a lavish lifestyle in North Dakota consists of a new truck and a vacation instead of a new yacht and some caviar.  Nevertheless, as policymakers try to address the issue of income mobility, South Dakota’s remarkable growth rate is a statistic worth analyzing.

According to Phoenix Marketing International, North Dakota’s remarkable growth stems from the state’s booming shale industry.  The growth in shale oil and fracking has not only allowed North Dakota to have the highest growth in millionaires, but also the country’s lowest unemployment rate.  Thanks to an increase in disposable incomes throughout North Dakota, the shale industry has led to a boom in retail stores and restaurants, driving the states’ unemployment rate down to 2.6%, which is an entire percentage point lower than any other state in America!

Furthermore, North Dakota is not the only place to benefit from a growing energy industry.  After North Dakota, Louisiana had some of the most impressive millionaire growth in 2013, and in Houston, growth in in High-Net-Worth-Individuals reached 9.6% in 2011, outperforming every other city in the USA.

Given the tremendous impact that increased energy production has had in places like North Dakota and Houston, it seems logical for policymakers to examine the energy sector as a conduit for economic recovery.  As the world economy recovers form the Great Recession, energy demand increases; as the energy sector grows to meet this demand, income mobility increases, demonstrated by the growth in millionaires and High-Net-Worth-Individiuals in middle America.  Importantly, this type of growth is exactly what America needs.  At at time when income inequality and limited income mobility seem to plague the United States, energy production stands out as a way to strengthen the middle class and increase the accessibility of the American Dream.

news about oil price

Today WSJ released a news, OPEC anticipated that the recent recovery of US and EU’s economy situation may result in oil demand raise in the future. But it also pointed that the turmoil in emerging markets could implies an opposite result on the prediction.

The main push forces of global oil demand are from developing countries like China and Brazil. According to OPEC’s report, the oil demand growth for this year will be 50,000 barrels a day, and the most increase in demand is from China, the number 2 oil consumption nation.

In my opinion, developed countries are never the main long-term push forces for the global oil demand. EU’s oil demand may contribute a lot in the raising demand as the result of the economic rebound, but US has its own strategy of replacing all oil import by domestic shale oil production. So unless some problems unexpectedly incur in the process of domestic production, the demand of oil import will decline in US for sure.

Speak of the devil, this article-U.S. Oil Prices Rise as Cushing Supplies Fall-reported some kind of emergent situation in US domestic oil supply:

Crude-oil supplies in Cushing fell by 2.7 million barrels to 37.6 million barrels, a three-month low, in the week ended Feb. 7, the U.S. Energy Information Administration said Wednesday. The drawdown was the largest weekly decline since July

However, according to the article, this temporally fall in supply was caused by nothing but “Without sufficient transportation capacity connecting the new sources of oil to existing refineries, much of that supply has been stuck in storage in Cushing.” So we can see that this is only a short period supply shortage, which will not affect the long-term trend.

Even though the potential increase in demand from China, I still think that the total demand of developing nations is weaker. From the economic point of view, demands from developing countries are expected to go downside because of the troubles in emerging markets. From the currency’s point of view, Fed’s tapering of its QE will worsen the inflation situation in emerging market countries, which means comparatively those oil import nations’ currencies are more and more worthless now. The weak currency purchase power compare to the higher oil price will result in the future decline in aggregate oil demand.

It is said that global oil price has as inverse ratio to the dollar index because the world’s staple commodities are priced in the unit of USD, so if US dollar appreciate relative to other’s countries’ currencies, the price of oil may decrease. If this is true than the price of oil will still stays high until the raise of interest rate in US, which seems to be unrealistic now.

Overall, the global oil price will experience more shocks this year. And I think that in the short term the price may rise a little, however, since the upside is blocked, the price will experience decline in the long-term.

Why Green Energy is falling behind

Energy has quickly become both a polarized topic of discussion among politicians and economists.  In 1956, M. King Hubbard, a geologist, coined the term “Peak Oil”.  Peak oil was the belief that the United States would hit its peak oil production, based on discovery and production from oil fields.  The 1970 oil embargo by OPEC created a new threat to the national security of the United States.  Politicians began to scramble and fret over what would happen if the United States was cut off from its oil supply.  The oil embargo and hitting “peak oil” in the 1970s scared the hell out of politicians.  The importance of finding a new alternative to oil has been stressed relentlessly the past few decades.  Unfortunately, the idea of peak oil has proved to be unrealistic for two main reasons.  Even though Hubbard predicted we would reach peak oil in the ’70s, the United States production of oil is actually increasing again and reaching another peak.  Hubbard didn’t take into account the affect that the price of oil and the influence of new technology would have on peak oil and proven reserves.  Proven reserves are based on the current price of a barrel of oil and the technology available to extract it.  Hence, as the price of oil increases, companies are able to extract more oil from more risky oil fields.  The increase in deep sea drilling and drilling in the arctic shelves are examples.  The increasing price and technology, like fracking, have increased the proven reserves and proved the idea of peak oil to be wrong for now.  The US is currently going through an oil boom that has it on pace to become one of the largest oil producers in the world.  While this does not solve the environmental issues with using oil as a source of energy, it solves the political, national security issue and the economic problems that would come from running out of oil.

The question now becomes, how does this effect the development of green energy sources.  Unfortunately, right now no green energy source is efficient.  Solar energy doesn’t have the ability to provide energy on a large grid, wind energy is too risky due to the uncertainty of weather and hydro power, while efficient on small scale, is hard to be transported to areas that are not close to water.  Major countries have begun to notice this and have begun to shift away from green energy as they try to recover economic growth.  The EU recently agreed to get rid of a per-nation cap on carbon emission.  According to Germany, if they continued with the original plan to increase renewable by 50% by 2030, it would increase utility costs by 4-5.5%.  Due to these increased costs, Germany has reduced its plan to increase renewable energy to around 40% by 2030.  While this is still an increase in renewable energy output, the new German coalition party though will most likely make revisions if Germany’s economy doesn’t reach pre-recession levels.

Based on the current global slow down of the economy, I don’t see many countries willing to absorb higher costs to support green energy.  Unless there is new innovation in green energy that makes it more efficient and less costly, oil will still stay king with the high oil prices.