Deborah Lawrence had been watching a once-empty parking lot near Midland-Odessa, Texas, fill up with idled drilling rigs usually at work plumbing for oil in the nearby Permian Basin. In January she noticed 10 rigs, then 17 a few weeks later. As winter turned to spring, the number climbed to 35.
If science and good sense aren’t enough to make us shift to renewable energy, perhaps economics will.
That trend has continued across the country. By the end of July, the nationwide rig count had slipped 54 percent since the same time a year ago, indicating distress in the oil and gas industry. The most obvious culprit is the precipitous drop in crude prices. But the trouble goes deeper, as Lawrence knows—and she isn’t just a casual observer. Lawrence is a former Wall Street financial consultant who now runs the Energy Policy Forum, helping to identify and analyze trends in the industry.
Right now, our fossil-fueled energy path has us on a roller-coaster ride and we are plunging, white knuckled. Production in the U.S. from the exploitation of shale oil (or tight oil), which accounts for 45 percent of the country’s oil production, will take a hit if prices continue to remain well below the $100 mark. Tens of thousands of jobs have already been cut and some debt-laden companies may go belly up.
This is the narrative that has been seizing headlines, but it’s not the whole story of what’s going on in our energy economy. While shales were booming and then busting, solar and wind have been surging. Renewables have been relegated to the sidelines of our energy priorities, a small blip in our electric generating capacity each year, but that is changing. How fast it happens could be enough to rock the boat in a major way.
The fact that we should be moving to more renewable energy and using less oil is no secret. Scientists have repeatedly warned that if we continue to burn fossil fuels with our current abandon, we risk catastrophic climate impacts, some of which we are already beginning to see. Instead, they caution, much of our oil, gas and coal reserves should stay in the ground.
But as long as fossil fuels remain cheap (ignoring externalities) and energy companies reap big profits from them, we will keep drilling and mining and burning—global catastrophe be damned.
If science and good sense aren’t enough to make us shift course, perhaps economics will. We’ve long heard that we must choose between jobs and the environment. Or between economic growth and clean energy. But more and more, it is looking like fossil fuels are the economic deadweight and renewables are finally ready for a seat at the table.
The U.S. boom in the production of oil and gas in the past seven years has been largely driven by horizontal drilling and hydraulic fracturing (or fracking) of rock formations known as shale plays. But the growth may not be as long-lived as advertised.
For starters, there’s good evidence to suggest that the amount of economically recoverable reserves of both shale oil and gas are not as much as previously hyped.
J. David Hughes, a geoscientist and fellow at the Post Carbon Institute, who spent 32 years with the Geological Survey of Canada, found that while short-term production of shale oil and gas is undoubtedly significant, the long-term view shows that the growth is not sustainable. His research reveals production peaking in both shale oil and gas in most of the significant plays in the U.S. by 2020.
The next problem facing the industry is the price tag of its operations. The costs to drill and complete a shale well can range from $6 million to $8 million or more a well—depending on the play and the number of drilling stages.
Production on shale wells also declines very quickly. For shale oil, the three-year average well decline rate in most major U.S. plays falls between 60 and 91 percent. Around half of all the oil that will be produced from these wells will come in the first three years. For shale gas, the three-year average well decline rate is between 74 and 82 percent.
This means that in order to maintain or increase production, you have to keep a frenetic pace of new drilling—what Lawrence Berkeley National Laboratory scientist David Fridley likened to being on an “accelerating treadmill.” The drilling frenzy that has characterized the shale boom caused a spike in production, contributing to a global glut, which has resulted in falling prices. It’s a vicious circle and one that was hard to make economical even when crude was selling for $100 a barrel.
When prices dropped earlier this year to around $50 a barrel, things became more dire for the shale industry and they haven’t greatly improved in the last six months. Despite briefly reaching around $63 a barrel in late spring, prices have fallen again. “For the past five years we’ve been told we’re going to be energy independent and we will have all this oil and we’re going to export gas to Europe and we’re going to export gas to Asia and it’s just not going to happen,” said Fridley.
Overproduction, combined with declining consumption, has resulted in plummeting crude prices in the past year. It’s the same script that occurred just a few years earlier, when shale gas prices bottomed out in the U.S.
Install, Baby, Install
In March the Texas city of Georgetown announced plans to ditch gas and coal for electricity generation in favor of wind and solar. The city’s spokesperson told the press it was “primarily a price decision” and the Texas Tribune reported that the switch allowed Georgetown to “lock in cheaper electricity” and “hedge against any future spikes in coal or natural gas prices.”
If you don’t closely track the energy markets, you may be surprised to know that generating electricity from wind and solar is cost competitive in some places in the U.S. already—and getting close in many others. Globally, renewables could even become the top source of electricity in just 15 years, according to a new report by the International Energy Agency.
Renewables still account for a small percentage of overall U.S. electricity generation—13 percent for all renewables, with wind at 4.4 percent and utility-scale solar at less than 1 percent. But some states are showing that much greater exploitation of renewables is indeed possible. Iowa got 27 percent of its total electricity from wind in 2013 and last year California became the first state to get more than 5 percent of its electricity from utility-scale solar.
In the past seven years, wind and solar capacity in the U.S. has tripled and new capacity has favored renewables. In 2014 wind and solar made up 55 percent of new electric generating capacity in the U.S. By comparison, natural gas was 42 percent. The other new sources—coal, nuclear and oil—were all under 1 percent.
Currently, the federal government allows a 30 percent investment tax credit for solar, but it is set to expire at the end of 2016, at which point it will decline to 10 percent. A report from Deutsche Bank says that even without additional subsidies, solar is already cost competitive in 14 states. If the credit is renewed and costs for solar continue to fall as predicted, then we could see solar electricity as cheap as average electricity bill prices in 47 states within the next two years, according to Deutsche Bank’s report. If the credit is not renewed, we could still see 36 states at grid parity.
“Gone are the days when solar panels were an exotic plaything of Earth-loving rich people,” Tom Randall writes for Bloomberg Business. “Solar is becoming mainstream.”
One of the things driving that growth is that costs are falling and the products are getting better. Solar and wind, points out Lawrence, are technologies and not fuels and as such they typically become cheaper with scale and time.
Even more promising, while prices are declining in these industries, the number of people employed has skyrocketed. The Solar Foundation reports that jobs in the solar industry grew by 86 percent in the past five years. As of 2013, according to industry estimates, there were 143,000 solar jobs and more than 50,000 in wind in the U.S.
For wind and solar, falling prices means more jobs. Lawrence likens it to what economists call a virtuous circle: “A recurring cycle of events, the result of each one being to increase the beneficial effect of the next.”
It’s the exact opposite of the shale industry’s vicious circle, where high production results in plunging prices, followed by thousands of layoffs.
“The self-styled ‘shale revolution’ was built on the back of very expensive oil and gas prices,” writes Lawrence. “Shales need very high prices to work. While high prices are great for oil and gas balance sheets, they cannot help but translate into more expensive products and services overall in the economy. It does not benefit all. It benefits only a few.”
The Path Forward
While there are a lot of reasons to be optimistic about future prospects for renewables, we have a long way to go and it’s not smooth sailing by any stretch. We’re talking about disrupting a system where the entrenched interests are some of the wealthiest companies in the world.
In the U.S., the best way to aid continued growth for renewables, the industry says, is to lock in federal support that investors and businesses can count on. The investment tax credit for solar that Congress can renew at the end 2016 is one example. For wind it’s the production tax credit (PTC), which dates back to 1992. In the past 23 years Congress has let the PTC expire a total of six times and has also elected to renew it six times. The results, as you can imagine, were a series of ups and downs for wind installation. “Industry needs confidence,” said Tom Kiernan, the CEO the American Wind Energy Association. “It needs multi-year extensions for as long as possible.”
There are other hurdles. Conservative groups like the American Legislative Exchange Council (ALEC) have helped launch attacks against state-level regulations such as the Renewable Energy Standards. In the last few years more than a dozen state-level bills have been introduced attacking those standards, but so far Ohio has been the only state to sign one into law. More successful at discouraging the growth of renewables have been utilities like Pella Electric Cooperative in Iowa, which will start tacking $85 a month to the bills of homeowners who install solar or wind systems. In Arizona, fees for homeowners installing solar may rise from $5 to $21 a month, although the utility (Arizona Public Service) originally proposed a hike as high as $100 a month.
At the most basic level, the country has yet to go all in on a commitment to supporting renewables, but economics may just push us there anyway. A new report from Citigroup dismissed ideas that cheap oil prices would negatively impact renewables, arguing instead said that a combination of “economic competitiveness, energy security and environmental goals” would quickly drive the global push for more renewables.
The price volatility in the oil and gas market is not going away anytime soon. And coal, still the biggest sources of U.S. electricity generation overall, has suffered a one-two punch from natural gas and renewables. From 2010 to 2014, coal’s net generation of electricity fell by 14 percent. The U.S. coal industry is now deemed in “structural decline” and there doesn’t seem to be any way up.
Coal’s fall and the oil industry’s latest stumble with shales reveal more cracks in the fossil-fuel industry’s once impenetrable wall of dominance. But the biggest threat to the industry will likely come soon, as the global community gets serious about tackling climate change. Our future energy plans will be contingent on how this plays out politically and economically.
Press link for more: Tara Lohan | eco watch.com