Showing posts with label trade war. Show all posts
Showing posts with label trade war. Show all posts

Thursday, February 25, 2016

OPEC's War on US Producers

The comments of Saudi Arabia's oil minister at the annual CERAWeek conference in Houston this week provided some sobering insights into the strategy that the Kingdom, along with other members of OPEC, has been pursuing for the last year and a half. Perhaps the ongoing oil price collapse is not just the result of market forces, but of a conscious decision to attempt to force certain non-OPEC producers out of the market.

Notwithstanding Mr. Al-Naimi's assertion that, "We have not declared war on shale or on production from any given country or company," the actions taken by Saudi Arabia and OPEC in late 2014 and subsequently have had that effect. When he talks about expensive oil, the producers of which must "find a way to lower their costs, borrow cash or liquidate," it's fairly obvious what he is referring to: non-OPEC oil, especially US shale production, as well as conventional production in places like the North Sea, which now faces extinction. If these statements and the actions that go with them had been made in another industry, such as steel, semiconductors or cars, they would likely be labeled as anti-competitive and predatory.

We tend to think of the OPEC cartel as a group of producers that periodically cuts back output to push up the price of oil. As I've explained previously, that reputation was largely established in a few episodes in which OPEC was able to create consensus among its diverse member countries to reduce output quotas and have them adhere to the cuts, more or less.

However, cartels and monopolies have another mode of operation: flooding the market with cheap product to drive out competitors. It may be only coincidental, but shortly after OPEC concluded in November 2014 that it was abandoning its long-established strategy of cutting production to support prices, Saudi Arabia appears to have increased its output by roughly 1 million barrels per day, as shown in a recent chart in the Financial Times. This added to a glut that has rendered a large fraction of non-OPEC oil production uneconomic, as evidenced by the fourth-quarter losses reported by many publicly traded oil companies.

That matters not just to the shareholders--of which I am one--and employees of these companies, but to the global economy and anyone who uses energy, anywhere. OPEC cannot produce more than around 37% of the oil the world uses every day. The proportion that non-OPEC producers can supply will start shrinking within a few years, as natural decline rates take hold and the effects of the $380 billion in cuts to future exploration and production projects that these companies have been forced to make propagate through the system.

Cutting through the jargon, that means that because oil companies can't invest enough today, future oil production will be less than required, and prices cannot be sustained at today's low level indefinitely without a corresponding collapse in demand. Nor could biofuels and electric vehicles, which made up 0.7% of US new-car sales last year, ramp up quickly enough to fill the looming gap.

Consider what's at stake, in terms of the financial, employment and energy security gains the US has made since 2007, when shale energy was just emerging. That year, the US trade deficit in goods and services stood at over $700 billion. Energy accounted for 40% of it (see chart below), the result of relentless growth in US oil imports since the mid-1980s. Rising US petroleum consumption and falling production added to the pressure on oil markets in the early 2000s as China's growth surged. By the time oil prices spiked to nearly $150 per barrel in 2008, oil and imported petroleum products made up almost two-thirds of the US trade deficit.


 
Today, oil's share of a somewhat smaller trade imbalance is just over 10%. Since 2008 the US bill for net oil imports--after subtracting exports of refined products and, more recently, crude oil--has been cut by $300 billion per year. That measures only the direct displacement of millions of barrels per day of imported oil by US shale, or "tight oil" and the downward pressure on global petroleum prices exerted by that displacement. It misses the trade benefit from improved US competitiveness due to cheaper energy inputs, especially natural gas.

Compared with 2007, higher US natural gas production, a portion of which is linked to oil production, is saving American businesses and consumers around $100 billion per year, despite consumption increasing by about 20%--in the process replacing  more than a fifth of coal-fired power generation and reducing CO2 emissions. $25 billion of those savings come from lower natural gas imports, which were also on an upward trend before shale hit its stride.
 
The employment impact of the shale revolution has also been significant, particularly in the crucial period following the financial crisis and recession. From 2007 to the end of 2012, US oil and gas employment grew by 162,000 jobs, ignoring the "multiplier effect." The latter impact is evident at the state level, where US states with active shale development appear to have lost fewer jobs and added more than a million new jobs from 2008-14, while "non-shale" states struggled to get back to pre-recession employment. That effect was also visible at the county level in states like Pennsylvania, where counties with drilling gained more jobs than those without, and Ohio, where "shale counties" reduced unemployment at a faster pace than the average for the state, or the US as a whole.
 
If the shale revolution had never gotten off the ground, US oil production would be almost 5 million barrels per day lower today, and these improvements in our trade deficit and unemployment would not have happened. The price of oil would assuredly not be in the low $30s, but much likelier at $100 or more, extending the situation that prevailed from 2011's "Arab Spring" until late 2014. If OPEC succeeds in bankrupting a large part of the US shale industry, we might not revert to the energy situation of the mid-2000s overnight, but some of the most positive trends of the last few years would turn sharply negative.
 
Now, in fairness, I'm not suggesting that this situation can be explained as simply as the kind of old-fashioned price war that used to crop up periodically between gas stations on opposite corners of an intersection. The motivations of the key players are too opaque, and cause-and-effect certainly includes geopolitical considerations in the Middle East, along with the ripple effects of the shale technology revolution. It might even be possible, as some suggest, that OPEC has simply lost control of the oil market amidst increased complexity.  
 
However, to the extent that the "decimation" of the US oil and gas exploration and production sector now underway is the result of a deliberate strategy by OPEC or some of its members, that is not something that the US should treat with indifference.

This is an issue that should be receiving much more attention at the highest levels of government. The reasons it hasn't may include consumers' understandable enjoyment of the lowest gasoline prices in a decade, along with the belief in some quarters that oil is "yesterday's energy." We will eventually learn whether these views were shortsighted or premature.

Tuesday, March 13, 2012

A Cleantech Trade War with China?

While we wait to see whether the next big move in oil prices--and hence gasoline prices--is up or down from today's level of around $125 per barrel, two stories in today's Wall St. Journal highlight some of the challenges facing manufacturers of equipment used to produce renewable energy. One concerns the intention of the US administration to seek the World Trade Organization's assistance in easing China's restrictions on its exports of rare earth materials used in a wide range of devices, including wind turbines, hybrid and electric vehicles, and some solar panels. The other is an op-ed offering a solution to the looming trade war over solar panel and wind turbine tower exports from China, modeled on the 1996 Information Technology Agreement that lowered trade barriers in that industry. The two stories are related, reflecting major unintended consequences of the ways we have approached our transition away from fossil fuels and toward lower-emission sources of energy.

Trade wars are risky things, because you never know where they will lead. The classic example of this is the Smoot-Hawley tariff of 1930. It and the responses to it by other countries helped deepen and extend the Great Depression, and I have never seen any analysis of them that concluded they were a good idea. A major trade dispute now over renewable energy hardware and the ingredients needed to produce it looks doubly unwelcome, because none of the parties comes to it with clean hands. Much of China's output of rare earths is being consumed by China-based manufacturers producing permanent magnet wind generators, electric vehicle motors, compact fluorescent lights, and solar equipment, much of which is exported to global markets that owe their very existence to government interference in the form of manufacturing, deployment and consumer tax credits; government loans and loan guarantees; feed-in tariffs; and fuel economy and lighting efficiency standards. There's hardly a single aspect of the global cleantech industry that is the result of unaided market forces.

The US complaint about solar imports is a good example. I wouldn't be surprised if the US government can make a strong case that the Chinese solar firms in question benefited from government assistance in ways that constitute unfair competition under established rules of international trade. Yet the same US government has provided substantial assistance to US solar manufacturers in the form of direct R&D support and federal loans and loan guarantees, as well as indirect help in the form of solar investment tax credits, cash grants, and project loans and loan guarantees that helped create and sustain a domestic market for them. All of these were necessary, because despite the significant cost reductions these incentives facilitated, the output of solar panels is still substantially more expensive than electricity from conventional generation. If we win this round with China, do we open the door to a whole series of WTO complaints against us by others who could claim harm from our own renewable energy policies?

From my perspective, these trade issues are a symptom of the larger problem of global overcapacity in wind and solar equipment manufacturing that has been created by the complex interaction of a mare's nest of national and local incentives and support for the production and deployment of these technologies, amplified by the disruption caused by the global financial crisis and recession of a couple of years ago and the ongoing financial crisis in Europe. A vast industry was created out of nothing and handed a market through a set of policies that could not sufficiently fine-tune development to prevent the emergence of a boom-bust cycle, and that now appears to be unsustainable itself in light of developed-country deficits and debts.

Trade disputes are one possible mechanism for attempting to rationalize this overcapacity, but in my view they constitute a much less productive approach than the one suggested by Professor Slaughter, who if I understand his proposal correctly is urging the rationalization of the government subsidies that have caused this situation in the first place. My biggest concern about his advice is his choice of the UN climate negotiating process as the best body to pursue such an initiative. That might be an appropriate venue, but its recent history doesn't inspire much confidence that it is up to the task.