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Low Oil Prices Kill Energy Investments

Last week I pub­lished a blog arti­cle that dis­cussed energy pol­icy and sug­gested that an effec­tive energy pol­icy requires fed­er­ally estab­lished min­i­mum oil prices. Low and volatile oil prices destroy pri­vate invest­ment in energy projects because returns become too uncer­tain to attract financ­ing. As oil trades between $40 and $50 per bar­rel invest­ment capac­ity for energy projects is dis­ap­pear­ing. On Mon­day, the New York Times pub­lished a great arti­cle writ­ten by Jad Mouawad that artic­u­lates exam­ples of sup­ply destruc­tion occur­ring from low and volatile oil prices.

If the U.S. wants to break its addic­tion to imported oil, set­ting and main­tain­ing floor prices for oil, gas and coal must be a cen­ter­piece of U.S. energy pol­icy. With­out min­i­mum prices, “in the real world” investors won’t com­mit enough cap­i­tal to domes­tic energy projects so that the U.S. can become energy inde­pen­dent. Domes­tic free mar­ket cap­i­tal can’t com­pete with for­eign gov­ern­ment spon­sored cap­i­tal and energy pol­icy needs to rec­og­nize this incon­ve­nient truth.

Also, with­out min­i­mum energy prices “green energy” will remain a mirage on the hori­zon, always there but always beyond our reach. Green energy is more expen­sive than gov­ern­ment spon­sored Mid­dle East­ern oil and, with­out price sup­ports, it won’t attract the nec­es­sary invest­ment dol­lars to com­pete with cheap for­eign oil. Green energy advo­cates fail to real­ize that gov­ern­ment man­dates aren’t the same thing as mar­ket solu­tions. Only min­i­mum prices estab­lished through a vari­able sur­charge will pro­vide the mar­ket solu­tions that are needed to get green energy alter­na­tives into the mainstream.

Below are some excerpts from Jad Mouawad’s New York Times article.

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been sus­pended or can­celed in recent weeks as com­pa­nies scram­ble to adjust to the col­lapse in energy markets…

…But the project delays are likely to reduce future energy supplies…

…The pre­cip­i­tous drop in oil prices since the sum­mer, com­ing on the heels of a dizzy­ing seven-year rise, was a reminder that the oil busi­ness, like those of most com­modi­ties, is cycli­cal. When demand drops and prices fall, com­pa­nies curb their invest­ments, lead­ing to lower sup­plies. When demand recov­ers, prices rise again and com­pa­nies start to invest in new pro­duc­tion, start­ing another cycle…

…Invest­ment in alter­na­tive energy sources like bio­fu­els that had flour­ished in recent years could dry up if prices stay low for the next few years, ana­lysts said. Banks have become reluc­tant lenders, espe­cially to renew­able energy projects that may prove unprof­itable in an era of low oil and gas prices…

…Accord­ing to research ana­lysts at the bro­ker­age firm Ray­mond James, domes­tic drilling could drop by 41 per­cent next year as com­pa­nies scale back…

…“We expect oper­a­tors to sig­nif­i­cantly cut their activ­ity in the com­ing weeks due to the hol­i­day sea­son, and many of these rigs will not come back to work,” the report said.

Posted in: economy, Energy, Finance, Oil, Politics

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