With central planners promising such extraordinary economic returns from regulation, what could possibly go wrong?
What's ahead for global energy markets? How will the U.S. shale revolution affect our energy future? To find out, we asked Stephen Arbogast, an expert with more than thirty years of experience in finance working with the energy sector. As Prof. Arbogast explains, when it comes to global energy markets, the next decade will look very different from the last four decades. Stephen Arbogast is an Executive Professor of Finance at the C.T. Bauer College of Business, University of Houston. In that capacity, he has authored more than 70 case studies on technical and economic aspects of the energy business. He is also the author of the book Resisting Corporate Corruption, now in its second edition. Prof. Arbogast has taught in graduate MBA programs since 1987 and was awarded the Bauer College Payne Teaching Excellence Award in 2008.We thank Prof. Arbogast for taking the time to answer our questions. For more PERC Q&As, visit the series archive.Q: You’ve said that when it comes to the geopolitics of energy, the next decade could look quite different than the last four decades. What do you mean by that?A: The last four decades have been dominated by the operations of the OPEC cartel. With only occasional exceptions, this cartel has determined the general price level for crude oil. This price represents roughly two-thirds of the price of final products to consumers, so it is most consequential for the cost of energy in developed economies. The next decade could be different for two reasons. The first is the shale revolution. Right now, that revolution—unlocking oil and gas from tight rock formations—is catapulting the U.S. back to a position of world’s leading oil producer. What is not known is the extent to which this will spread to other lands. Many non-OPEC countries, including China, have vast shale resources. To the extent production surges outside of OPEC, the cartel’s dominance will certainly decline.The second issue is more ominous and concerns a key OPEC member, Saudi Arabia. For decades the Saudis have operated as OPEC’s flywheel, absorbing production cuts in times of glut and expanding production to combat scarcity. Will Saudi Arabia remain much as it has been in the years ahead? Will it still be ruled by the extensive Royal House of Saud? One looks at Syria, Egypt, Iraq, Libya, and Iran and wonders.Q: How has OPEC shaped oil politics in the past, and where are we headed?A: In 1973, OPEC discovered it could dictate the short-term price of crude oil. The cartel saw that developed nation oil demand is quite inelastic over the near term. This means the cartel could and did dictate price to its customers. The result then was a 400% price increase that brought to the OECD nations. Over time, the cartel also learned that abrupt price hikes sow seeds of reversion. Price hikes to $40/b in 1980 led to a demand bust and price collapse below $10/b in 1986.These experiences led OPEC, under Saudi leadership, to a price targeting strategy. The cartel seeks prices which balance several objectives. First, they must be high enough to generate current revenue to fund the political models in these states. These political models concentrate wealth in the state and purchase political support with generous handouts and subsidies. Second, the prices should not be so high that they trigger demand destruction undermining the price level’s foundation. Finally, they also should not encourage sustained efforts to replace petroleum with alternative fuels.Surveying the history of price levels since 1973, it must be conceded that OPEC largely achieved these objectives. No alternative fuels “silver bullet” has emerged. Demand for petroleum has grown and most forecasts show it growing for decades to come. Only the shale revolution and regional political stability raise the possibility of shaking the cartel’s grip on the energy price.Q: What role does Saudi Arabia play?A: Saudi Arabia plays the role of “swing producer” within the cartel. This means the Saudi’s reduce production in times of glut and increase it during moments of peak demand. Cartels generally require some member willing to play this role—otherwise supply and demand excesses will drive prices to cyclical peaks and troughs.The Saudis have unique characteristics that, alone among OPEC members, allow them to play this role. First, they possess huge oil reserves, estimated to exceed 200 billion barrels. This allows the Saudis to add production capability and maintain the spare capacity needed to cushion demand peaks. Second, the Saudi have a small population. Until recently that population did not exceed 20 million. This meant that the Kingdom could amass large financial reserves during periods of peak demand and prices. These reserves could then be drawn upon to fund domestic spending when slack demand required the Kingdom to cut production.It is not as clear going forward that the Saudis will be able to play this same role. Despite their ample reserves, the Saudis seem to be having difficulty increasing production capacity beyond 12 million barrels per day. Much of their “spare” is less desirable medium and heavy crude that encounters refining bottlenecks during demand peaks. Meanwhile, a larger, more subsidized population has raised the cost of preserving social peace. Indeed, one can detect elements of domestic concern in the current Saudi hard line towards Syria and Iran.All this said, the graveyards are full of people who prematurely forecast the demise of the House of Saud. The shale revolution, ironically, could pose more of a threat than disturbances among their neighbors if it undermines the crude price and pinches the Saudi paternalistic ruling model.
Terry Anderson, Shawn Regan
In the Wall Street Journal, Terry Anderson and Shawn Regan explain how Washington rules prevent tribes from developing resources that could help lift them out of poverty.
Bryan Preston reports that the federal government is ordering private contractors to close campgrounds and the like on federal lands even where
There is fairly broad opposition to centralized environmental regulation within the Republican Party today. Conservative activists in particular focus their ire on the Environmental Protection Agency and federal efforts to maintain or enhance environmental quality.
PERC research fellow Shawn Regan provides testimony for the U.S. Senate Committee on Energy and Natural Resources hearing on "Funding the National Park System for the Next Century."
The EPA and some European countries are on the warpath against coal. Technology exists to capture most of its emissions, so coal burning is not the dirty process it was decades ago. But coal is the main CO2 culprit in the climate change (aka global warming) debate.
Steven F. Hayward
President Obama unveiled drastic new regulations on Tuesday to curb greenhouse gas emissions. PERC board member Steve Hayward previewed the president's speech earlier this week on The Kudlow Report.
Spots versus stripes? Which do you prefer? Our federal government prefers spots and is moving forward with a million-dollar-a-year plan to remove 9,000 striped owls from western forests.
While politicians continue the budget cut stalemate, entrepreneurs are quick to provide goods and services to the public.
PERC senior fellow Randy Simmons writing on the sequester as an exercise in the Washington Monument strategy.
For more than two decades, special interests have persuaded Congress to mandate Americans buy ethanol whether they want to or not. As a result, 40 percent of the U.S. corn crop is now used for ethanol rather than food.
James M. Buchanan, the Nobel laureate in economics and father of public choice theory, has passed away at the age of 93. Buchanan's work formed the foundation for PERC's early research on environmental issues.
Steven F. Hayward
Would the EPA be better run by a bipartisan commission? Reform the agency by politicizing it, says PERC board member Steven Hayward.
Excerpt from "For all the hot air, little of substance on climate change in Presidential race":Some experts think it’s not so bad that the campaigns have pretty much ignored climate change. They say that good policymaking is hard in such a polarized environment. That’s the view of Dino Falaschetti, the executive director and an economist at Montana-based Property and Environment Research Center, a think tank that promotes a free-market approach to environment issues.
There is substantial theoretical and empirical
This morning I received a CNN “Breaking News” alert that “President Obama said today he is elevating the Small Business Administration to a Cabinet-level agency.” My first reaction was utter disbelief.
Today the House of Representatives is expected to vote on the REINS Act, a bill to enhance political accountability over regulatory decisions. The bill has two essential features.
One of the hypocrisies of modern environmental law is its double standard of enforcement: strict application to small entrepreneurs, and exemptions for politically powerful players like large industry and municipalities.
The Clinton administration signed off on the Roadless Rule [PDF] in 2001 to preserve 58.5 million acres of national forest land by preventing road construction, reconstruction
Amid the state's budget crisis last spring, California's governor threatened to close more than 70 state parks by the spring of 2012 to save the state money. This threat of park closure is a common occurrence in California and other states.
Earlier this month President Obama asked the Environmental Protection Agency to shelve a proposal to tighten the National Ambient Air Quality Standard for ozone this year.
A useful principle in business is not to throw good money after bad trying to salvage a mistake.
Don't miss PERC senior fellow Bruce Yandle’s article in the latest issue of Regulation magazine.
ABC's Radio International interviewed PERC's very own Laura Huggins last week about the planned closure of 70 state parks in California later this year.
The threat of park closures is part of the state budget crunch package.
In a new deal with environmentalists, the Obama administration has agreed to work through a backlog list of species that require additional study to determine if they should be given protection under the Endangered Species Act.
Cross-posted at Grist.A recent post on Grist attempted to dismantle the intellectual foundations of free market environmentalism—the application of markets and property rights to solve environmental problems. But far from toppling a burgeoning movement within modern environmentalism, it succeeded only in misrepresenting the subject.To recap: Clark Williams-Derry claimed that while free market environmentalism may be effective in some areas of the environment (e.g., fisheries management), its reliance upon unrealistic assumptions about the real world largely relegates it to useless intellectual theorizing. In particular, the Coase theorem—an important component of market-based environmentalism named for Nobel Prize-winning economist Ronald Coase—amounts to “a quirky but not particularly relevant bit of theoretical math.”While there is certainly much more to free market environmentalism than the work of Coase (see Terry Anderson and Donald Leal’s book Free Market Environmentalism for more details), I focus here mostly on the misinformed critique of Coase that has been used to discredit free market environmentalism.So, who is Coase, what is his theorem, and what does it have to do with free market environmentalism?
It is often believed, and in fact intended, that regulations requiring increased energy efficiency will reduce energy consumption.
by Shawn Regan Over at Forbes.com, Art Carden pens this gem of a poem that retells Dr. Suess's classic "How the Grinch Stole Christmas" using property rights, Pigouvian taxes, and the Coase theorem--important concepts in environmental economics: How Economics Saved Christmas by Art Carden Every Who down in Whoville liked Christmas a lot.But the Grinch, who lived just north of Whoville, DID NOT.He stood and he hated the Whos and their noiseHe hated the shrieks of the Who girls and boysFor fifty-three years he’d put up with it now—He had to stop Christmas from coming, somehow.He asked and he questioned the whole thing’s legalityThen his eyes brightened: he screamed “externality!”He reached for his textbooks; he knew what to doHe’d fight them with ideas from A.C. PigouThis idea has merit, he thought in the frostA tax that was equal to external costAt the margin, would give all the Who girls and boysAn incentive to stop all their screaming and noiseFailing that, an injunction to make them all ceaseAnd they’d have to pay him to have their Roast Beast.
by Reed Watson
by Shawn Regan