What if the Energy Department is Right?

This article was published by The McAlvany Intelligence Advisor on Friday, May 2, 2017:

Tom Lombardo appears to be a self-effacing journalist, professor, and armchair philosopher with a certification as a Professional Energy Manager. He calls himself either “an idealistic pragmatist” or a “pragmatic idealist,” but with no discernible ties either to the energy industry or the green movement. That’s what makes his assessment of the Obama Energy Department’s study published last summer on renewable energy remarkable. If he’s correct, then Big Oil is shortly going to have a day of reckoning in Alaska.

Writing at Engineering.com, Lombardo reviewed a report emanating from the Energy Department in August last year titled, “Estimating Renewable Energy Economic Potential in the United States: Methodology and Initial Results.” After looking at various energy scenarios (the Energy Department did no forecasting in its report), Lombardo summed up the study: “Looking at the worst case scenario … additional renewable energy [from photovoltaics, wind, hydroelectric, and geothermal] could meet about 30% of our total electricity needs and still remain economically viable.”

Lombardo thinks that, given some breaks, renewables could provide a much greater part of the country’s needs for electricity. If he is anywhere near correct, the entire global energy equation could shift against fossil fuels within the next decade, certainly within the next generation.

That puts an entirely different spin on the enthusiastic reception given to Trump’s Interior Secretary Ryan Zinke when he signed an order on Wednesday reversing one of Obama’s major crimps in oil development in Alaska. That 2013 order removed half of the immense National Petroleum Reserve – Alaska (NPR-A) from consideration for energy development. Said Zinke:

This is land that was set up with the sole intention of oil and gas production; however, years of politics over policy put roughly half of the NPR-A off limits.

Using this land for its original intent will create good paying jobs and revenue for our Northern-most city and strengthen our energy and national security. Working with the Alaska Native community, Interior will identify areas in the NPR-A where responsible energy development makes the most sense and devise a plan to extract resources….

This order in effect makes Alaska open for business.

There’s no question that the undeveloped resources on the coast of the Arctic National Wildlife Refuge (ANWR) and NPR-A are immense. The last time a serious study was done by the USGS back in 1998, it estimated proven reserves at 10 billion barrels of oil along with massive volumes of natural gas. It was later revised upward to 25 billion, but there are those suggesting that, given improvements in technology, there might be as much as 100 billion barrels of crude obtainable using today’s technology beneath Alaska’s tundra.

What’s questionable is whether, by the time Zinke has completed his study, gotten permission from Congress to allow private companies to develop those vast areas (and fighting off the ubiquitous greenies who want to keep everything in the ground “where it belongs”), the economics will still make sense.

As OPEC’s influence fades and U.S. frackers pick up the slack, the wholesale price of crude oil and natural gas will continue to decline. Developing Alaska has its own special challenges (just one example here: the tundra will not support heavy vehicles except during the darkest and coldest of the winter nights), which pushes out the breakeven point for profitably lifting oil to the point where Big Oil might just take a pass.

There’s the challenge from electronic and autonomous vehicles (EVs and AVs), which are coming on stream more quickly than many predicted. Their arrival is shaking the foundations of the entire automobile industry, with some observers suggesting that garages will be turned into living spaces and dealer lots will be filled with AVs waiting for their next assignments. At present, half of oil refineries’ output goes to gasoline. As that demand declines, so will profits, and profits ultimately drive the decisions to invest.

The bravest of prognosticators (those willing to risk the “forecaster’s dilemma”: predicting both what will happen and when) suggest that the first drop of oil to enter the Alaska pipeline from new development arising from Zinke’s reversal won’t happen until 2021. As the pace of change accelerates, especially with software-running AVs and EVs reducing transportation costs to consumers to a quarter of what they are today, Big Oil just might decide that Alaska is too cold, too risky, and too expensive to develop.

Sources:

Bio of Tom Lombardo

The Wall Street Journal: Trump Administration Explores More Drilling in Alaska

History of Arctic National Wildlife Refuge ANWR

Background on Prudhoe Bay, Alaska

The Daily Caller: Trump’s Interior Secretary Issues Order To ‘Jump-Start’ Alaskan Oil Production

EENews.net: With new actions, Zinke says Alaska is ‘open for business’

Prudhoe Bay Oil Field

National Petroleum Reserve – Alaska  NPRA

Tom Lombardo’s article: Is Renewable Energy Economically Viable?

NREL.gov: Estimating Renewable Energy Economic Potential in the United States: Methodology and Initial Results