America’s Next Exports

Posted Friday, Feb. 07, 2014  comments  Print Reprints
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In mid-January I was in the offices of Kwik Industries in North Dallas discussing future projects with owner Ray Ellis. Since the early 60s Ellis has been building car washes and lube centers for individuals; at one, the car wash attached to the Conoco station on Camp Bowie, Skipper Brown and I pumped gasoline in 1968. But on this day Ellis was showing me a new location he had acquired in Haslet, where he was about to start construction on a new project. Opening up the satellite map a bit more, he worried, “I just don’t know how anyone is ever going to develop that area,” adding, “there’s just too many gas wells.”

I’d never thought of North Texas’ Barnett Shale region that way. But Ellis, showing me the small beige squares that marked wells, pointed out how they literally covered the landscape along 156 from Haslet up to Highway 380 just west of Denton. While natural gas wells packed together in wide-open country would never have been a problem in the past, one can see on the map that the massive population growth in North Texas is about to butt up against many of these well sites from now on. Who but the Perot family would have ever thought the northern end of our city would one day reach the intersection of I-35W and 170?

True, one dealer friend purchased 10 acres of land so he could expand his store’s parking facilities, only to find that the mineral rights had long ago been sold. Shortly after his real estate transaction closed, along came a drilling company and plopped a gas well on his property, rendering it useless for his intended expansion.

Invisible Gold, Texas “S”

Well, hey. Texas is an energy state; nothing gets in the way of our rush to find new sources of oil and natural gas. It’s clearly part of our economic DNA: Even as Texas suffered through one of its worst droughts in more than 50 years — and while our agricultural families suffered billions upon billions in losses — there was always seemed to be enough water for the next fracked well, be it natural gas up north or oil in the Eagle Ford Shale field in South Texas.

And when those extremely heavy drilling trucks tore up the Farm to Market roads they traveled, TxDOT’s best plan of action was to say that there was so little money in our highway fund that they were going to allow 83 miles of FM roads to return to their former graveled condition. Maybe we can name them Texas Heritage Roads.

Still, for all of fracking’s downside risks, there was that golden promise — made to every American, not just here in Texas but across the United States — that for the first time in 50 years, we were finally on the path to real energy independence.

Not only would oil and natural gas become abundant, we were told, but this new glut of energy that we had so willingly signed on for, despite the downside risk, would drive those commodities’ prices down. We could even see the immediate benefit in natural gas prices, which in 2012 fell back to the same levels as we’d had back in the late 90s. Too bad none of us had natural gas-powered vehicles in which to take advantage of those prices.

As for oil, no one could officially explain how all the additional crude we’d brought to market over the past few years hadn’t so much as dipped the price of oil on the futures market. It remained stubbornly high. But in some ways, that didn’t matter, either. After all, these new natural gas and crude oil supplies were making us energy independent, and a boon to our local economy.

Maybe those promises alone were good enough. And one indirect byproduct of that, in our deregulated state, was lower electricity charges per kilowatt-hour.

On the other hand, the promise of total energy independence may have been seriously oversold.

Been There, Done That

The First Energy Crisis of 1973 prompted President Nixon’s promise to have the U.S. energy independent by 1980, resulting in legislation authorizing the Alaskan Oil Pipeline. That pipeline went from virtually no oil pumped in 1975 to 1.5 million barrels per day in 1980, which is almost the exact amount by which U.S. oil production has increased since 2008. But, it should be noted, that extra Alaskan oil did nothing to stop the Second Energy Crisis in 1979, nor did it mitigate the price of oil in that period. Today, just 26 years after the Alaskan Oil Pipeline peaked at 2 million barrels per day, it is about to fall to just 25 percent of that total volume.

As for the promise to the American people of cheap and never-ending natural gas and oil production to power our cars, trucks, boats, trains and aircraft, that promise too is changing rapidly. In fact, the discussion has shifted altogether.

The Greater Good

Since 2010 plans have been announced to build at least eight massive LNG export terminals for shipping our natural gas to world markets where it would bring premium prices. Sabine Pass, Freeport, and Corpus Christi’s Cheniere in Texas; Jordan Cove in Coos Bay, Oregon; South Union in Lake Charles and Sempra in Hackberry, Louisiana; Dominion in Cove Point, Maryland; and Oregon LNG in Astoria are among the planned multi-billion dollar plants and ports meant to ship our natural gas worldwide.

The net effect will be to take our current low pricing for natural gas (which rose dramatically in 2013) and bring it more into line with world pricing. Energy plus labor creates productivity and economic value; in countries where labor is dirt cheap, higher energy prices are more easily affordable. That’s where a great deal of our natural gas will be going.

And it’s supposed to, because that’s how business economics work. There’s basically nothing wrong about that proposition; it’s just Economics 101. The only issue with it is that we were told we were fracking for our benefit — for energy independence in our country.

US Product the World Loves

So now comes the national push to allow oil produced in America to be exported to world markets, for the same reason. On the futures market WTI crude has been selling at a $9 discount to Brent. Western Canadian Select, a much more sour crude, has often sold for up to $45 less than WTI because enough major pipelines don’t yet exist to carry all of that crude to refiners and ports in America and Canada.

To be fair, WCS will always sell at a discount because refining it costs more. Once all the pipelines are in place and it too can be bought and sold on futures markets and exported worldwide, though, it likely won’t sell for a $45 discount.

Again, nothing wrong with that. It’s just energy economics, or oil companies legitimately trying to find the highest prices for their products.

I’m reasonably certain the restrictions on exporting American oil will be lifted for many reasons — reciprocity, profits and balance of trade deficits, to name but three. Those are three extremely valid reasons for selling our oil or natural gas to higher bidders elsewhere.

But, if you still think the American energy revolution of the last decade was meant to create real energy security just for us while keeping the lid on unpredictable prices … that was only a promised dream.

Time to wake up to economic reality.

© Ed Wallace 2014 Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net; read all of Ed’s work at www.insideautomotive.com.

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