Email of the day (1)
Comment of the Day

October 25 2012

Commentary by David Fuller

Email of the day (1)

On energy dependence:
Once again you have mentioned the US becoming energy independent which is clearly a game changing prospect. There have been a few newspaper comments recently about North America becoming energy independent but not about the US becoming energy independent. I assume you do mean US rather than North America. If so what effect do you think it will have on Canadian energy production, some of which is very expensive? More interesting still, how do you think world politics will change if the US no longer needs Arabian Oil? A possible US withdrawal from the Middle East?"

David Fuller's view Thank you for your important questions on a topic of considerable interest to Fullermoney and our Collective of Subscribers. When we first started talking about US energy independence several years ago, it was regarded as a pipe dream within the financial community. They underestimated the US-led march of energy technology, inspired by a 'needs must' reality within the fossil fuel extraction industry.

Technology is also developing the renewable energy industry but this will take more time to perfect, in terms of scale and competitive costs. Wasteful government subsidies which rush through often ill-conceived, unreliable and uncompetitive renewables for politically correct reasons do not advance the cause. Instead, they are a drain on taxpayers and a threat to energy independence.

Fullermoney has long maintained that US energy independence was achievable within the first half of the next decade, and we regard that as a conservative estimate. If it does not happen, it will be due to politics, not a lack of technology or supplies.

The USA has long been known as the 'Saudi Arabia of coal'. Coal is currently out of favour in the US and many other developed countries, and regarded as a pariah industry due to environmental damage during extraction and particularly the high CO2 emissions from coal-fired power stations. The extraction of any commodity from the earth is a messy process. However, technology and responsible regulation can and will, if allowed, progressively reduce environmental damage. Governor Romney has said that he wants to develop clean coal and this sounds sensible to me.

The USA also has the largest known reserves of shale oil and the second largest reserves of shale gas. I have been hearing about it since the 1960s although there was no commercially viable method of extracting this unconventional oil and gas. However, in the 'needs must' tradition that inspires so many inventions, George Phydias Mitchell, a native of Texas, is generally regarded as the father of hydraulic fracking.

The process remains controversial, not least because of concern over possible pollution of aquifers due to leaks, and also because of the large quantities of water required for the process of fracking. Nevertheless, this is a new industry that is developing rapidly. For instance, engineers have now developed non-hydraulic so-called dry fracking. This is a process that uses gelled propane instead of water, the premise being that less volume is required and it reverts back to gas which is pumped out along with the fuel sought. This article from Gizmag explains the process under development by Chimera Energy and others. This interview from Huffington Post indicates that the waterless fracking was invented by the Canadian Robert Lestz of GasFrac.

Caution - the poor share performance of these two companies (Chimera has been suspended) which are not in the Library, says more about the competitive pressures for start-up firms, rather than the viability of technologies, in my opinion. We see this in all developing fields, from automobiles near the beginning of the last century to tech companies post-2000. Many are drawn to a new field, often with good ideas, only to be out muscled and winnowed during the ruthless competitive process.

I mention all of the above because the US is in a strong position to become energy independent, subject to internal politics. Canada, of course, is already energy independent and a major exporter of oil and gas. Some expensive Canadian energy production, mentioned in the email above, will be subjected to the rigours of mostly and preferably free market prices, just like any other industry. Assuming the email question was primarily in reference to the Alberta tar (oil) sands, I can remember the debate within Canada many years ago, concerning this source of energy. On the question of whether or not to develop or preserve it, I recall (mostly paraphrase) an Alberta official saying that if they did not develop this valuable resource, they would be left with "dirty sand." He was right and presumably familiar with the adage: "The stone age did not end because people ran out of stones."

Regarding the last two questions in the email above, I hope and suspect that world politics would be better off without the US being dependent on Arabian oil. Oil and gas are fungible commodities and US energy independence would mean that more was available for everyone else. This would help to support Fullermoney's view that energy prices will be lower, in real terms, on average in the next decade.

If there is a caveat to this forecast it concerns Jevons Paradox, last mentioned by Eoin on 16th October and 29th February. We assume that in the next decade at least half the global population will have a smart phone and / or a tablet, not to mention all the other energy consuming necessities and luxuries.

Lastly, the US is already withdrawing ground troops from the Middle East. Hopefully and preferably, it will only need to maintain a military presence in the region as part of an international force to maintain peace, although I appreciate that this is a best-case scenario.

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