Don’t get us wrong. We favor a coherent, forward looking national energy policy. One that limits our dependence on foreign resources for reasons of national security, encourages economical use of affordable energy, and helps build a financially strong energy industry that can compete in world markets. Let’s concentrate on these adjectives: “coherent,” “forward looking”and “financially strong” because they go together. Investors want a consistent and forward looking policy. They do not want to tie up money in assets that are uncompetitive or subject to contract revisions at the whim of the government. So, let’s consider four news items that say a lot about current energy policy.
1. The Bureau of Land Management (BLM) launched possibly the biggest coal sale in decades, a lease on a Montana property containing 167 million tons of coal. In October, the BLM rejected the one bid it received, $187,000 from the Navajo Transitional Energy Co., which had a mine adjacent to the property. We didn’t misplace any zeroes. It works out to 1.1 cents per ton. (The previous accepted bid was $1.10 back in 2012.) The BLM rejected the bid, as it did for two other Western coal auctions. Bids didn’t reflect “market value.” The government blamed the low bid on “the lingering impact”of the Obama-Biden “war on coal.” (As an aside, the volume of coal used for electric generation grew 0.6% per annum in the George W. Bush years, declined 5.5% per year in the Obama era, declined 9.5% per year in the first Trump administration and 3.5% per year in Biden’s ) The last coal fired plant went into service over a decade ago in Texas, and no new ones have been ordered. The main question nowadays is more like, “When will coal plant owners retire their units?” rather than “When will they build new ones?” Coal simply can no longer compete with other energy sources like natural gas. Did the BLM really expect enthusiastic bidding for the property? Do they really believe in the war on coal? If publicly solicited bids don’t represent market value, what does?
Related: Republicans Declare ‘Coal Week’ as Fossil-Fuel Agenda Goes into Overdrive
2. The administration halted work on the Revolution offshore wind project in September on “security” grounds. The project, being built by Danish company Oersted, is about 80% complete. (The administration halted another project on the grounds that the paperwork was “deficient”.) Oersted went to court, stayed the order, and will complete Revolution, after which who knows what will happen (maybe swap Greenland for Revolution?). There is more at stake than the project, though, because offshore wind requires service vessels, manufacturing facilities and shipyards which are industrial activities that would further the administration’s desire to revive the U.S. maritime industry. Was there a strategic purpose in closing down a project that will produce much needed energy that overrides the damage done to our reputation as a safe place to invest?
3. Tennessee Valley Authority (TVA), a federal government agency that is the nation’s largest power company, in September announced it would buy electricity from 6 GW of small modular reactors (SMRs) built by NuScale, with the press release emphasizing that TVA will not take any construction risk. Southern Company said the same thing when they started building Plant Vogtle and Westinghouse went bankrupt as a result. ( Do the parties taking the risk have the resources to bear it?) We should note that the few SMRs built to date have come in wildly over budget, including NuScale’s previous effort. In short, we doubt that the SMRs will produce power at a cost less than conventional or renewable resources, but the deal does provide a test ground for a new type of reactor which might provide needed power if electricity demand rises as expected. And the builders get a form of government support that does not require explicit approval of Congress.
4. The price of oil in October dropped to $62 (Brent) and $58 (WTI). Trump’s energy policy is emphasizing the supply side: open up to leasing, drill baby, drill, but more supply without more demand means lower prices, and prices have dropped to a level that may preclude profitable drilling, in part due to weak demand and in part because our friends in the Middle East have kept up their production in order to protect market share. The administration cannot boost demand for oil or gas any more than it can boost demand for steam coal but could it exercise some muscle to persuade our friends in the Middle East to let up (“Listen MBS you want our fighter planes, then stop selling cheap oil”) but that would raise gasoline prices and push up inflation, so forget that idea.
Peter Drucker, the legendary management consultant, advised firms to direct their resources to their winning lines of business rather than to shoring up the losers. The energy business, we would argue, is in the midst of a wave of creative destruction, as new energy technologies supplant old ones. Trump’s energy policy seems to be a combination of determined opposition to new ideas and ineffective support for the old. We asked a Washington insider to explain what theme dominates the administration’s energy policy. He was puzzled, then said, “Possibly a visceral hatred of renewable energy except for geothermal.” Is that the basis for an investable energy policy?
By Leonard Hyman and William Tilles for Oilprice.com
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