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The Future of Fossil Fuels

PETROLEUM

Dependence on foreign oil has long been an issue for the United States, and significant efforts have been made to reduce the need for it.

The most recent figures suggest that these efforts have been successful, as the U.S. imported just 42% of oil consumed last year. This represented a 15 percentage point de-crease from 2008, and a drop to the lowest level in two decades. This decline is projected to continue through the year 2025[i].

This is largely thanks to booming domestic production of oil, up 26% since 2008, a result of improved technology and new reserve discoveries. The number of oil rigs operating in the US more than doubled over the last four yearsⁱ.

Increased production is just one of several factors that have contributed to low oil prices recently. The U.S. Energy Information Assoc-iation had originally projected that oil prices would average over $100 per barrel in 2012 - but currently it changes hands at less than $90 per barrel[ii].

But, to keep things in perspective – even with current prices well below projections, the cost of oil has more than doubled in the last ten years, and analysts still believe that prices will reach that $100 per barrel level within a year[iii].

Indeed, in the current environment it is easy to forget that oil was at a stunning $145 per barrel in July of 2008. One factor to consider when contemplating the future of oil is the many negative externalities associated with its use.

While it is a very energy-dense fuel, it produces a large amount of greenhouse gases. Environmental concerns will likely continue to be a key factor as stringent regulations on fuel usage and pollution continue to be implemented. As a result of these regulations, fuel usage per capita is projected to decline steadily through 2035.

Furthermore, the oil market is very exposed to some of the most politically unstable regions in the world. The Organization of the Petroleum Exporting Countries, or OPEC, is composed primarily of nations in Africa and the Middle East. The escalating civil war in Syria is just the most recent example of conflict and strife in this region.

Overall, oil is here to stay for the foreseeable future. There are a multitude of factors that will influence the production and use of this energy source, and by extension its impact on the world economy.

NATURAL GAS

Natural gas has also had increased production as of late, as major technological advances have been made in the science of extracting this resource. Hydraulic fracturing, also known as “hydrofracking” or just “fracking,” has allowed natural gas to be taken from the abundant shale regions in the United States.

Fracking is a controversial and complicated process. When employing this technique, a well is drilled down vertically through many layers of rock and sediment until the shale is reached. The pipe is then drilled horizontally, and a mixture of chemicals, water, and sand is pumped down at high pressure, fracturing the rocks and releasing the gas. When the pressure recedes, gas flows up the pipe and is thus extracted.

This process has received an abundance of criticism from environmentalists, who cite contaminated drinking water, illness, and even earthquakes as potential results of fracking. The practice is banned in several countries, inc-luding France and Germany, and several states, including New York and New Jersey. However, in many states this method is legal, and the Environmental Protection Agency has imp-lemented guidelines for the acceptable use of “Underground Injection”[iv].

Hydraulic fracturing is just one advancement that has contributed to a marked increase in production, which has almost doubled since 1986ⁱ. Indeed, spikes in drilling combined with decreased short-term demand (as a result of one of the mildest winters on record) brought natural gas prices down 86% from highs in the middle of the last decade, and caused some gas to be sold for less than the cost of taking it out of the earth^iv.

This trend is unlikely to continue however, and some analysts are calling these recent conditions a “black swan” event. In the future, consistent, sustainable production and demand has been predicted by the U.S. Energy Information Association. The EIA predicts that domestic shale gas production will rise 174% to 13.6 trillion cubic feet per year by 2035.

These changes have the potential to significantly affect the economy. Natural gas is cleaner for burning than both coal and oil, and is used in a variety of applications, including heating, cooking, transportation, electricity generation, and the production of plastic, fertilizer, anti-freeze, and some fabrics. Sarah Emerson of Energy Security Analysis, a research firm, has said “The potential here is phen-omenal” – as changes in the economics of nat-ural gas will affect every industry it touches.”

CONCLUSION

How will the trends currently affecting fossil fuels influence the market?

First, the companies involved in the extraction of these fossil fuels, from those who design the technology to those who physically take it out of the ground, stand to benefit from consistent, sustainable, and growing demand.

Second, there is a huge opportunity for those that transport these resources – the companies that operate pipelines. There is a critical short-age of pipelines in the United States right now, and some companies have had to resort to “flaring” or burning off extra fuel when it comes to the surface because there are not enough pipelines to transport it. Free market economies do not tolerate these kind of inefficiencies for long, and these companies stand to benefit greatly as they rise to meet this demand.

Finally, the fate of alternative energy companies is predicated upon prices for fossil fuels. When fossil fuel prices are high, demand for renewable energy increases proportionally, and green alternatives become not only more viable but also more economical.

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