July 2001

Editorial comment

California's self-made energy problems; More drilling hasn't delivered more gas

July 2001 Vol. 222 No. 7 

Thomas R. Wright, Jr., 

Left Coast saga continues

While it doesn’t have a direct impact on the rest of the world’s energy situation, California’s problems highlight the compounding effect of governmental bungling. In case you’re just tuning in, it all started with the NIMBY (not in my backyard) attitude that halted construction of electrical generating facilities there. La-la landers were happy to use copious amounts of electricity to fuel their high-tech boom, but demanded that the generators (and their pollution) be located outside the state.

Then, the politicians made a feeble attempt to board the deregulation bandwagon, but they made a fatal error. They deregulated the wholesale price for electricity, but capped the retail price, presumably to protect the consumer. Needless to say, somebody missed a critical portion of their economics class. But, lest we belabor the situation, here’s the latest on government ineptitude there:

Electricity needed for making gasoline. One of California’s methods of dealing with the electricity shortage has been the imposition of rolling blackouts; thus sharing the misery equally. The problem is that gasoline refiners are as subject to these temporary losses of power as everybody else.

However, when power is shut off to a refinery, everything comes to a halt, and it doesn’t resume with the simple flick of a switch. An hour-long shut-down may lead to a two- to three-day restart, since tanks must be drained and heating units must be brought back to temperature.

Thus, California refiners are requesting that they be exempted from the blackouts. Chevron, in fact, warned Governor Gray Davis that unless exemptions are granted, the result could be a shortage of critical fuels, such as gasoline, jet fuel and diesel. And if Chevron, which generates around 90% of its own power, is concerned, imagine what a blackout will do to Valero Energy and others that don’t generate their own electricity. If a blackout does shut down a refinery, causing a fuel shortage and price spike, we don’t have to tell you who will get blamed.

It’s dirty, but cheap. In a surprising turn of events, California officials have put U.S. regulators on the defensive by requesting an exemption from a rule requiring the addition of ethanol to gasoline. The oxygenate has been used almost exclusively since Governor Davis banned the use of MTBE, citing water pollution problems it may cause. Although oxygenates are used to improve the combustion of fuels, thus theoretically reducing air pollution, the governor wants to spare his voters the pain of higher gasoline prices that result from using ethanol.

When President Bush, the recipient of much bad press for being anti-environment, stayed the course and hinted that he would keep the ethanol requirement, he was immediately charged with courting the farm vote (since ethanol comes mostly from corn). Poor Bush, if you include Big Oil, he’s been accused of "being in more pockets" than a bad penny.

Credit where credit’s due. Finally, given the above, we confess to feeling a little glee over the criticism Governor Gray is receiving. He has been quick to blame any and everybody outside of California for problems created by Californians. Several have hinted that the state’s ongoing crises may portend the end of Gray’s political career.

David Kralik of Americans for Tax Reform suggested such an outcome by coining the term "Grayouts" as a synonym for California’s blackouts. And the Wall Street Journal posed the following riddle: What’s the difference between the Titanic and Governor Davis? The Titanic went down with its lights on.

More drilling ¹ more production. In the U.S., at least, the recent rise in drilling hasn’t produced an attendant increase in gas production, according to a study by Simmons & Company International. In fact, Simmons concludes that "The lack of significant production growth in the reported production data from public companies confirms . . . that the combination of underlying depletion, capital discipline and capital return focus of the industry will make sustainable production growth difficult."

In its report, "1Q01 Reported Oil and Natural Gas Production Trends – Still Waiting on the ‘Big Lag’," Simmons analyzes reasons behind the decline in natural gas prices from their $10/Mcf December 2000 peak, to below $4/Mcf. While many blame large inventory builds and record levels of gas-directed drilling, Simmons arrives at a very different conclusion – significant supply response remains elusive. They believe the imbalance is the result of several demand-side factors, including: mild weather, fuel switching from natural gas to liquid petroleum products and NGL bypass.

The company’s first-quarter 2001 oil and gas production volume compilation includes reported results from a representative group of large publicly traded major and independent producers. The group accounts for about 50% of U.S. natural gas production, 50% of U.S. liquids production and 20% of non-U.S., non-OPEC liquids production. Additionally, the group operates about a third of active U.S. drilling rigs and nearly half of those that can drill deep-gas targets.

While this group posted a gain in first-quarter U.S. gas production, the fourth-quarter 2000 benchmark was artificially low due to extreme, cold-weather-related shut-ins in December. Also, first-quarter gas production results reflect a temporary boost due to the reduction in NGL stripping. Finally, a look at the last 12 months of trailing U.S. rig counts and well depth data suggests that drilling mix and quality has not markedly changed. The firm sees these factors converging to illustrate an industry still struggling to hold its head above water against the strong undertow of depletion. To review the above report in detail, go to www.simmonsco-intl.com.

Credit where credit’s due II. Last month on this page, we reproduced a photo of an ingeniously designed, one-cow-powered vehicle that was sent to us via e-mail. Since then, we have discovered the true source of the photo. When the May issue of the Far Eastern Economic Review arrived, we turned to our favorite department, "Travelers’ Tales," whereupon we encountered the same picture. This aptly illustrates the speed at which plagiarism can occur in the cyber age. Our apologies to the Far Eastern Economic Review. WO

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