ENERGY COMPLICATIONS

Over the Christmas Holiday season I used some of my “free time” to study some of the bigger stories of the past year.  Some significant and fascinating things are happening in the world of energy.  However, the issues involved are incredibly complex.  Unfortunately the mainstream media tends to ignore complex issues and focus on things that are sensational, but shallow.  Unfortunately, the media’s failure to cover this story means that the public never gets educated about these truly important developments.

 

In recent years the energy industry has been transformed.  That transformation has been worldwide in extent, and transcends numerous industries.  Just a few years ago the American energy industry was in decline, with a very gloomy outlook.  For better or worse, the industry was transformed by new technologies including directional drilling, hydraulic fracturing (“fracking”), and seismic testing that showed where oil and gas reserves were located.  Slowly at first, but then more rapidly, the new technologies have opened up huge reserves of both natural gas and oil.  America is now on the verge of energy independence, and could begin exporting fuel (with some statutory changes) in the near future.  Many geographic areas have experienced economic booms as employment and wealth have soared.  New York hasn’t participated because of our state’s position banning fracking.

 

Whether you oppose or support fracking, the reality is that we have all been impacted by it.  The most obvious impact is lowered fuel prices.  Because of the dramatic increase in the fuel supply the price of fuel, including natural gas, fuel oil, electricity, gasoline, etc., have plummeted.  This has been great for consumers.  It has also helped numerous industries hurt by the Great Recession to get back on their feet.  Cheaper energy costs is one of the major reasons that America has recovered from the Great Recession faster than most other countries.  This has helped create jobs, reduce product prices, and enabled various government programs to cut back.

 

The shift in energy supplies has had international political impact.  The Middle East is still important, but no longer has the ability to dictate energy policy to the rest of the world.  This has enabled America, Europe, Japan and China to operate with greater independence than previously.  Perhaps the greatest recent impact has been on Russia.  In recent years western and central Europe have been critically dependent on Russia for natural gas for home heating and industrial purposes.  The glut of energy has forced down prices for natural gas. This is causing huge problems for Russia, as well as Middle Eastern energy producers.  Prices have dropped by more than 60% over recent months, and may soon drop further.   What will this mean for Russia? Will it force out Vladimir Putin, as suggested by some commentators?  Will it force Putin to change some of his policies in Ukraine and other areas?

 

Most of us are thrilled with the lower prices at the gasoline pump, and for home heating bills.  However, those lower prices mean that energy companies are making a lot less money than they were a few years ago.  As a result there have been recent reductions in new drilling, exploration and development.  Eventually this trend will result in reduced supplies and increased prices.  This is a known and totally predictable cycle.  There is really no way to control or prevent the cycle from operating.  The key is to recognize it, and take advantage of the opportunities it offers, while avoiding the pitfalls that it brings.

 

Both as individuals, and as government, we need to engage in long-term planning.  We cannot just react to circumstances, and ignore the long-term impacts.  We must also learn to accept reasonable risks and costs, while rejecting short-term advantages, that have unacceptable long-term consequences.  There are very few perfect solutions, that don’t involve making reasonable tradeoffs.  We must balance the good and bad.  As noted at the beginning of this article, this stuff is incredibly complicated.  It is also extremely important.

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