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Though crude prices are dropping, there's no need to panic

A lot of people have been ringing their hands lately about the falling price of crude oil. I’m not one of them.

That’s not to say there isn't any cause for concern. Prices are down in the neighborhood of 30 percent, though Brent crept above the $80 mark at the end of last week and U.S. crude ticked up 66 cents, to $76.51. Unless you’re motorists, who get relief at the pump, or refiners, who make more money when oil prices drop, the decline is probably less-than-great news.

Still, this is no time to panic or to utter the dreaded “B” word – bust.

Prices are going down because supply is rising and demand is falling. The U.S. shale revolution has nearly doubled domestic oil and gas production since 2007. Libya is somewhat unexpectedly putting about 900,000 barrels per day into the global market. The Asian economy is slowing down in general, and especially in China, where there are indications that the world’s largest petroleum importer will have its weakest growth in almost a quarter century. (I do want to note, however, that China’s central bank cut interest rates Friday, which helped push Brent prices past $80.)

So it’s a pretty simple equation: Oversupply puts downward pressure on prices. But I’m still not all that worried, for a lot of reasons.

While many of the doomsayers are saying that the only way to stem the price drop is to put the brakes on shale production, they’re forgetting one thing: According to the Department of Energy, only 4 percent of the nation’s shale output needs an oil price above $80 to break even on their investments. So I wasn’t surprised to see last week that drillers are still planning on higher output even in a lower-price environment, or that the Energy Information Administration forecast that production in the Permian, Bakken, and Eagle Ford plays will keep going up.

Companies are also drilling more strategically. As long as prices stay lower, they will shift their focus to more productive areas and cut back activity in the less-productive, less-efficient ones. So they can still extract a lot of oil in the $75 to $80 range and be profitable.

That’s not to say there’s no impact on drillers. We’re already seeing cases where some companies are cutting capital expenditures, reassessing long-range plans, or taking a “wait-and-see” decision-making approach. And there will probably be some consolidations in the future.

At the same time, though, there have been reports that Devon is going to raise output by up to 25 percent next year, Pioneer by up to 21 percent, and EOG by double digits.

Those kinds of numbers hardly signal a panic in the oil patch.

Of course, as has been so often pointed out, oil prices are set on the global market, where OPEC – despite its weakened political clout, thanks to U.S. shale – remains a dominant player. That’s why all eyes will be on Vienna this week, where the cartel meets Thursday. There’s something of a civil war going on between Saudi Arabia, which has opposed a production cut in an effort to slow the American shale boom, and nations like Venezuela, which wants a cut in order to push prices back up.

What will happen at the meeting is anybody’s guess; predicting the outcome of a power struggle is a risky bet at best. For what it’s worth, Bank of America predicted Friday that the organization would cut production by no more than 500,000 barrels per day, as Saudi Arabia puts sales volumes over stopping the slide in prices. We’ll see.

But that’s beyond the control of U.S. drillers. What is in their control is an ability to produce oil efficiently and to adjust strategically as the market shifts. That’s what they’ve been doing, and that’s what they’ll continue to do. So while no one can be certain if prices have bottomed out – though I suspect they have, or are close to it – I think it’s safe to say that the domestic energy boom has in no way run its course.


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A strange headline reveals some painful truths for fractivists

I imagine that for most people, the headline in the Washington Post seemed laughably strange:

“Study: Fracking chemicals found in toothpaste and ice cream.”

Strange? Maybe. But also true. Researchers from the University of Colorado at Boulder found that fluids used in hydraulic fracturing include a lot of chemicals that are found in products Americas use, eat, or swallow all the time – including toothpaste, laxatives, and even ice cream.

The study sampled fracking fluids from five states, focusing on surfactants, which are used to break the surface tension between water and oil and allow for more oil to be extracted. Basically a soap, they are a critical ingredient in the “cocktail” that drillers use in the fracturing process.

Here’s what Michael Thurman, lead author of the study, had to say about the findings:

  • “We found chemicals in the samples we were running that most of us are putting down our drains at home.”
  • “What we learned in this piece of work is that the really toxic surfactants aren’t being used in the wells we have tested.”
  • “We’re finding chemicals that are more friendly to the environment.”
  • “The surfactants themselves are some of the same compounds that we use day to day, they are not some kind of dark, super-toxic chemicals.”

To most of us in the industry, this comes as no big surprise. Fracking fluids are 99-plus percent sand and water, and use chemicals that are also found in things like hair color, IV fluids, detergents, and cosmetics.

But what was interesting was the response from the anti-fracking movement, which has made a collective career out of pushing the idea that the fluids are dangerous. Or, perhaps better stated, the non-response.

One Colorado activist, given the chance to comment, declined, saying that any discussion of the study was “beside the point.” Except content of the fluid has always been the point to those opposed to fracking…until apparently it wasn’t.

“This study changes nothing,” said another. And it may not, at least from their perspective. Environmentalists have never felt constrained by the facts, so there’s probably little reason to believe that this study – from a respected school and not backed by the industry – will in any way soften their rhetoric.

But it should.

This is sound, objective science, and it deserves a place in the debate. As I’ve said before, the anti-drilling crowd has the absolute right to their own opinions. But they don't have the right to their owns facts. These facts speak for themselves. They need to be heard.


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In Denton anti-fracking vote, the fight is just beginning

Defying both logic and the law, voters in Denton, Texas, approved a ballot initiative last week to ban hydraulic fracturing within the city limits. Now the fight begins.

The day after the measure passed, the Texas Oil and Gas Association and the Texas General Land Office hit the city with lawsuits to prevent the ban from going into effect. Legislators are considering drafting a bill that would state clearly that oil and gas regulation is the responsibility of the Texas Railroad Commission (TRC). And Commission Chair Christi Craddick said the TRC is going to keep approving permits in Denton regardless of Tuesday’s vote.

And it all could have been avoided if the people behind the initiative had been willing to come to the table and work with the industry to find a middle ground. But given that the movement is backed by Earthworks, one of the more extreme environmental organizations, that was probably never in the cards.

I’ve said it before and I’ll say it again: The ban is illegal. It’s a “taking” of mineral owners’ rights. It defies state law prohibiting localities from adopting an ordinance whose provisions are inconsistent with measures passed by the Legislature. It ignores the fact that the TRC has the authority to regulate the oil and gas industry. And it fails to recognize that mineral rights are dominant under state law.

Of course, it also conveniently overlooks the fact that fracking, done responsibly, is safe, and that local governments have about as much expertise in regulating a complex process like fracking as I have in quantum physics.

So it looks like we’re headed into an extended (and expensive) legal fight. And even though the law is clearly against Denton, there’s no guarantee the measure will get tossed.

Courts have been all over the map on outright fracking bans. They've been upheld in New York, for example, and rejected in Colorado. In both cases, a central issue was whether local governments had the right to take over a responsibility granted to the state. So the past isn't necessarily predictive of the future.

My guess is that the whole matter will end up before the state Supreme Court. And while, again, predicting where the justices will land is a fool’s errand, the high court has traditionally been sympathetic to the mineral rights arguments.

If this case is going to play out in the courtroom, it’s going to cost the people of Denton a lot of money in legal expenses. If the ban goes into effect, the city could lose hundreds of millions of dollars in economy activity and tax revenues, and lose as many as 2,000 jobs. But activists are going to do what activists do, the collateral damage notwithstanding.

So I think Austin should go ahead and craft the necessary legislation to prevent local bans, and Craddick and the TRC should go ahead and keep approving drilling permits in Denton. Call me a dreamer, but maybe at some point in this process, the environmentalists will see that the deck is stacked against them – legally and economically – and realize that sound policy is a function of compromise and not confrontation.


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More Undeniable Proof of Fracking's Economic and Environmental Benefits

It’s been a good week or so for the economy and the environment, thanks in no small part to the surge in domestic energy production.

First, the news that’s hard to miss: Over the weekend, average gasoline prices dropped below $3 for the first time in nearly four years. They decreased more than 33 cents per gallon in October alone, and some analysts believe they could go down another 15 cents. A gallon of milk is now more expensive than a gallon of gasoline. Who’d have thought?

While all this is good news for drivers, there’s a larger economic story here.

It is estimated that for every penny the average price falls, over $1 billion in additional consumer spending becomes available. The recent decline in prices translates to between $500 and $600 in extra disposable income for Americans. That money is forecast to fuel (no pun intended) a 4.2 percent increase in retail sales this holiday season.

There’s no doubt that horizontal drilling and hydraulic fracturing are two of the prime drivers (again, no pun intended) behind all this. Those techniques have enabled drillers to more effectively and efficiently extract tight oil from shale, so output has soared, U.S. refiners have boosted production in response, and pump prices have plummeted.

As a result, the oil and gas industry – which is already creating tens of thousands of jobs and generating hundreds of millions in tax revenues – is once again at the forefront of a great economic success story.

On the environment, the U.S. Energy Information Administration released a report that showed energy-related CO2 emissions have fallen in five of the past eight years. According to EIA, this is largely because of reductions that the electric industry has achieved; from 2005 to 2013, CO2 releases from the power sector dropped about 15 percent.

This time, it’s natural gas that’s largely responsible for the decline.

EIA credits the “substitution of less-carbon-intensive natural gas-fired generation, displacing coal and petroleum generation” for the reductions. More specifically, switching fuel sources reduced CO2 emissions by 212 million metric tons in 2013.

Obviously, the move to gas-fired generation can to a large degree also be attributed to the soaring output in shale plays, providing generators a less-expensive, cleaner alternative to coal. Keep in mind, too, that the October report from EIA follows on an earlier report in September in which the agency said that methane emissions from fractured wells dropped 73 percent since 2011.

What all this tells me is this:

While industry critics have been working overtime to smear hydraulic fracturing, drillers have shown that done responsibly, fracking can help strengthen the economy and protect the environment. Falling gas prices and reduced CO2 and methane emissions are only the latest proof of just how undeniable that is.

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Study shows that big oil is middle-class America oil - but are critics listening?

One of the favorite terms that anti-drilling politicians and environmentalists like to use when attacking domestic energy production is “big oil” – the idea that the energy industry is just a bunch of huge, monolithic, faceless entities. But a new study shows just how wrong they are.

Last week, a report from Sonecon, an economics and security consulting firm based in Washington, shows that “big oil” is actually “middle-class American oil.” According to the research, in 2014 individual investors who are not company executives or directors own 65.5 percent of publicly traded oil and natural gas companies. Most of this – 46.8 percent – is held in pension plans and retirement accounts.

The study concludes that the ownership of companies “is very broad-based, including large holdings in the retirement plans of ordinary investors”; that middle-class households “dominate” ownership of these companies; and that “by owning oil and gas company stock, these middle-class households benefit from the industry’s strong returns.”

Forgive me for a second, but I’m going to climb back up on my soapbox about political hypocrisy.

President Obama and members of his administration have for years been railing against the oil and gas industry. They’ve criticized “subsidies” that aren’t subsidies. They’ve gone after industry tax breaks while omitting the fact that those breaks are available to other manufacturers. They’ve assailed federal tax policies that, in fact, are more beneficial to small, independent companies than to “big oil.”

And at they same time, they have taken credit for a surge in production that has created jobs, generates tax revenues, reduced our dependence on foreign oil, and pulled a sluggish U.S. economy back from the brink.

Now, to paraphrase Ronald Regan, there they go again.

The White House has positioned itself as a big defender of the middle class. Yet on energy, its rhetoric – and, I suspect, the regulations that will come after next month’s elections – is aimed at an industry that to a large degree is owned by the middle class. So when the administration tries to turn public opinion against oil and gas companies, it’s the middle-class that could pay the price – literally.

This is another instance where the energy industry must do a better job of getting the facts out and telling its story. Those who want to reduce oil and gas profits on one hand and stand up for the middle class on the other need to be held accountable for the contradiction. Try as they might, they cannot have it both ways.

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