Old King Coal

The October Oil and Gas issue

Hey there, welcome to the October issue about oil and gas. You might think, why the hell is this guy writing about oil, isn't this a newsletter about polymers and plastics? Oil is the foundation that the majority of the chemical industry is built on and fluctuations of what happens in the oil markets eventually percolate and influence the chemical industry. This can take anywhere from a few weeks to a few months, in the event of a Hurricane hitting Texas it can take a few days. If you want to predict the near future of chemicals, understand what is happening in oil.

Oil Spills 

There were two big oil spills that happened recently. The most recent happened just off the coast of Orange County, California. Kris Maher from The Wall Street Journal reported on the story and said that the cause of the leak was a pipeline eruption about 5 miles from the shore. The pipeline took oil from about 70 wells and transported it to a local refinery. The coast guard had reported that the spill covered about 13 square miles and the local beaches are having oil and dead fish wash onto the sand. The area most affected is Huntington Beach.

The second oil spill was in early September in the Gulf of Mexico. The spill was spotted after Hurricane Ida passed through. Hiroko Tabuchi and Blacki Migliozzi reported on the What We Know of the story. The Gulf of Mexico is a big extraction zone for oil and gas and as a result there are a network of pipelines below the water that move crude oil from wells to refineries and other downstream operations. Talos Energy was tasked with the cleanup and they reported a broken 12-inch pipeline that was not owned by Talos that appeared to be responsible for the spill. The leaking pipeline has slowed significantly early in September.

These two oil spills are horrible, but they are the cost of doing business. These are not the first nor are they the last oil spills we will witness. We need oil. We need the refined fuels and we need the chemicals it can produce. I think once electric cars and non-oil based aviation fuels gain significant market adoption the oil companies we know today will have either become vertically integrated chemical companies, alternative energy and storage companies, or both. The guilt I might feel when it comes to filling up our car with gasoline gets normalized and the guilt might flare up when we read about oil spills. We don’t pay directly for the cost of doing business, but someone will eventually.

Also, this happened in on Wednesday at a Marathon Refinery in Texas City. Details of the story can be found here via Houston Public Media.

There are no easy solutions here, but we essentially have to build a new economy not focused on oil while we are dependent on oil. It’s going to take a lot of smart people across the value chain and it’s going to take some brand new technology getting scaled up.

Pricing Power And Dwindling Supply

Stanley Reed had two excellent articles recently in the New York Times in September. The first was around oil prices nearing a three year high. The three different oil types are about $75-80 per barrel, but natural gas prices have been surging, which could make heating homes during the winter months in the northern hemisphere quite costly. The costs are higher in spite of the production increases that got pushed out in July from OPEC with a lot of blame being put on Hurricane Ida and increased demand as the pandemic wanes.

Reed’s second article was about the fading oil industry in Scotland. The North Atlantic has long been a rich area to extract oil, but production peaked in 1999 and recently so has natural gas. Reed reported:

Jobs connected to the offshore oil industry have fallen nearly 40 percent over the last five years, according to Oil and Gas UK, a trade group.

Scotland’s first minister Nicola Sturgeon asked Boris Johnson to reassess licenses for offshore oil fields west of the Shetland Islands. This appears to be due to a large amount of pressure from constituents with environmental concerns and concerns about how burning fossil fuels is contributing to global climate change. The COP26 is being held in Glasgow in November and it appears that both Sturgeon and Johnson want to appear to be tackling climate change. Growth of renewable energy such as offshore wind power in Scotland is rising.

I think these two stories are a microcosm of the global issues around oil prices, the need to burn fossil fuels, and maintaining high paying jobs that can support whole economies. Is it better for the people of Scotland to try and hold onto the last few oil jobs or just go all-in on renewable energy jobs? I think the answer is ultimately the renewable energy business long term, but this transition could be painful for those who have built careers on oil and gas.

Speeding Up The Green Energy Transition

Liz Hampton had a great story in Reuters this week about how Big Oil is courting US clean-energy start-ups. Oil companies such as Baker Hughs, Halliburton, Repsol, and others are trying to put their profits into clean energy startups either through corporate venture capital arms, accelerators, or incubators where start-ups get access to equipment, funding, and expertise. Hampton reported I think on the heart of the story here:

There are roughly 20 clean-tech U.S. incubators tracked by the Electric Power Research Institute. But that number likely undercounts the total because of their rapid growth, said Julia Travaglini, vice president of marketing for Greentown Labs.

So far this year clean energy investment has hit $11 billion and is already double what was invested in 2020. There is more money chasing clean technology opportunities and oil companies are seeking to make the transition away from being oil companies to becoming renewable energy providers. This means that there is a high likelihood that oil prices keep going up as access to new wells and oil fields become restricted. As electric vehicles and new energy generation options become more viable the demand for oil should decrease and production will follow to maintain high prices for the operations that remain. Prices could get even higher if subsidies get phased out. This means long term higher prices for chemicals.

Higher oil prices due to fear of lack of future supply is something that Clifford Krauss and Peter Eavis wrote about in The New York Times. They outline these sorts of issues where the Biden administration wants two things that are essentially in conflict:

  1. Increase oil production to send the price of oil lower, which is beneficial to regular people like you and me

  2. Get Congress to approve funding to build infrastructure and spend money on speeding up the transition to renewables

These two calls for action from the Biden administration are in conflict with one another from a policy perspective, but this is what trying to make a transition looks like. The first call to action is something that can be done now while the second is something that is for the future. The idea that oil prices could plunge again has spooked investors, but if oil prices remain high then this hurts the lowest income population disproportionately. 

The argument against more production is that this will increase investment in alternative energy generation and storage, which will help drop renewable energy prices. It’s easy to say that more investment in renewable energy generation will lead to more renewable energy projects, but when will there be a $5000 used electric vehicle for sale? Most people cannot afford to buy a new car, much less a new used car.

Also, I think there is a fear of these communities who have been supported by oil and gas for decades of the wells running dry and there being a lack of good jobs. This is already happening in Scotland and I suspect it will happen everywhere. Texas could be next. 

The cost of doing business around oil might become too much for those who considered it acceptable. An oil filled beach in Orange County California might be the last straw for some gasoline powered car holdouts to switch to electric or for an investor to finally throw in the towel on the fossil fuel market. 

If there is a cautionary tale around what could happen to the oil and gas sector I think we just need to look at coal. Once upon a time coal was the only energy business to be in and it was huge, especially in West Virginia, Eastern Kentucky, and Western Pennsylvania, but eventually new technologies such as natural gas power plants replaced coal. Eventually, something will replace natural gas too. As Sturgill Simpson wrote in his song Old King Coal:

And Old King Coal what are we gonna do

When the mountains are gone and so are you?

Hopefully we know what we are gonna do when oil the wells are gone.


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