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.
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