Friday, November 22, 2013

Five Myths About the "Carbon Asset Bubble"

  • The idea that efforts to mitigate climate change expose fossil fuel assets to the risk of a bubble-like collapse has attracted some high-profile supporters.
  • However, the notion of a "carbon bubble" depends on questionable assumptions concerning our current knowledge of climate change, the rate of adoption of renewable energy technology, and how such assets are valued.
In their recent Wall St. Journal op-ed, Al Gore and one of his business partners characterized the current market for investments in oil, gas and coal as an asset bubble. They also offered investors some advice for quantifying and managing the risks associated with such a bubble. This is a timely topic, because I have been seeing references to this concept with increasing frequency in venues such as the Financial Times, as well as in the growing literature around sustainability investing.



The IEA’s calculation of a carbon budget depends on a factor called “climate sensitivity.” This figure estimates the total temperature change resulting from a doubling of atmospheric CO2 concentrations. The discussion of climate sensitivity in the recently released Fifth Assessment Review of the Intergovernmental Panel on Climate Change (IPCC) sheds more light on this parameter, which turns out not to be known with certainty. Their Summary for Policymakers includes an expanded range of climate sensitivity estimates, compared to the IPCC’s 2007 assessment, of 1.5°-4.5°C with a likelihood defined as 66-100% probability. It also states, “No best estimate for equilibrium climate sensitivity can now be given because of a lack of agreement on values across assessed lines of evidence and studies.”

The draft technical report that forms the basis for the Summary for Policy Makers provides more detail on this. It further assesses a probability of 1% or less that the climate sensitivity could be less than 1°C. That shouldn’t be surprising, since temperatures have already apparently risen by 0.8°C above pre-industrial levels. At the same time, the report indicates that recent observations of the climate — as distinct from the output of complex climate models — are consistent with “the lower part of the likely range.”

In other words, while continued increases in atmospheric CO2 resulting from increasing emissions are widely expected to result in warmer temperatures in the future, the extent of the warming from a given increase in CO2 can’t be determined precisely before the fact. For now, at least, the CO2 level necessary to reach a 2°C increase would be consistent with calculated carbon budgets both larger and smaller than the IEA’s estimate. That means that the basis of Mr. Gore’s suggested “material-risk factor” — as distinct from an uncertainty — is itself uncertain.

2. The Transition to Low-Carbon Energy Is Occurring Fast Enough to Threaten Today’s Investments in Fossil Fuels
There is no doubt that renewable energy sources such as wind and solar power are growing at impressive rates. From 2010 though 2012 global solar installations grew by an average of 58% per year, while wind installations increased by 20% per year. Yet it’s also true that they make up a small fraction of today’s energy production, and that the risks for investors of extrapolating high growth rates indefinitely proved to be very significant in the past.

For further clarity on this, consider the IEA’s latest World Energy Outlook, the agency’s analysis of global energy trends, which was just released on November 12. The IEA projects global energy consumption to grow by 33% from 2011 to 2035 in its primary scenario, which reflects expanded environmental policies and incentives over those now in place. In that scenario, the global market share of fossil fuels is expected to fall from 82% to 76%, but with total fossil fuel consumption still growing by 24% over the period. Only in their “450″ scenario, based on similar assumptions to its carbon budget, would fossil fuel consumption fall by 2035, and then only by 11%.

Moreover, in its April 2013 report on “Tracking Clean Energy Progress,” the IEA warned, “The drive to clean up the world’s energy system has stalled.” This concern was based on their observation that from 1990 to 2010 the average carbon dioxide emitted to provide a given unit of energy in the global economy had “barely moved.” That’s hardly a finding to be celebrated, but it serves as an important reminder that while some renewable energy sources are growing rapidly, fossil fuel consumption is also growing, especially in the developing world — and from a much larger base.

The transition to lower-carbon energy sources is inevitable. However, it will take longer than many suppose, and it cannot be accomplished effectively with the technologies available today. That’s a view shared by observers with better environmental credentials than mine.

3. All Fossil Fuels Are Equally Vulnerable to a Bubble
As Mr. Gore correctly notes, “Not all carbon-intensive assets are created equal.” Unfortunately, that’s a distinction that some other supporters of the carbon asset bubble meme don’t seem to make, particularly with regard to oil and natural gas. The vulnerability of an investment in fossil fuel reserves or hardware to competition from renewable energy and decarbonization doesn’t just depend on the carbon intensity of the fuel type — its emissions per equivalent barrel or BTU — but also on its functions and unique attributes.

The best example of this might be a recent transaction involving the sale of a leading coal company’s mines. What’s behind this wasn’t just new EPA regulations making it much harder to build new coal-fired power plants in the US, but some fundamental, structural challenges facing coal. Power generation now accounts for 93% of US coal consumption, as non-power commercial and industrial demand has declined. This leaves coal producers increasingly reliant on a utility market that has many other--and cleaner--options for generating electricity. That’s particularly true as the production of natural gas, with lower lifecycle greenhouse gas emissions per Megawatt-hour of generation, ramps up, both domestically and globally. Coal accounts for about half of the global fossil fuel reserves that Mr. Gore and others presume to be caught up in an asset bubble.

Compare that to oil, which at 29% of global fossil fuel reserves, adjusted for energy content, still has no full-scale, mass-market alternative in its primary market of transportation energy. Despite a decade-long expansion, biofuels account for just over 3% of US liquid fuels consumption, on an energy-equivalent basis. They’re also encountering significant logistical challenges and concerns about the degree to which their production competes with food. This has contributed to efforts in the EU to limit the share of crop-based biofuels to around 6% of transportation energy. Biofuels have additional potential to displace petroleum use, particularly as technologies for converting cellulosic biomass become commercial, but barring a prompt technology breakthrough they appear incapable of substituting for more than a fraction of global oil demand in the next two decades.

Electric vehicles offer more oil-substitution potential in the long run, though they are growing from an even smaller base than wind and solar energy. Their growth will also impose new burdens on the power grid and expand the challenge of displacing the highest-emitting electricity generation with low-carbon sources.

Meanwhile, natural gas, at 20% of global fossil fuel reserves, offers the largest-scale, economic-without-subsidies substitute for either coal or oil. In any case, it has the lowest priority for substitution by renewables on an emissions basis, and so should be least susceptible to a notional carbon bubble.

4. A Large Change in Future Fossil Fuel Demand Would Have a Large Impact on Share Prices
Although Mr. Gore’s article includes a good deal of investor-savvy terminology, it is entirely lacking in two of the most important factors in the valuation of any company engaged in discovering and producing hydrocarbons: discounted cash flow (DCF) and production decline rates. Unlike tech companies such as Facebook or even Tesla, the primary investor value proposition for which depends on rapid growth and far-future profitability, most oil and gas companies are typically valued based on risked DCF models in which near-term production and profits count much more than distant ones.

At a conservative discount rate of 5%, the unrisked cash flow from ten years hence counts only 61% as much as next year’s, while cash flow 20 years hence counts only 38% as much. Announced changes in near-term cash flow due to unexpected fluctuations in production or margins would normally be expected to have a much bigger impact on share prices than an uncertain change in demand a decade or more in the future.

This is compounded by the decline curves typical of many large hydrocarbon projects. If the first 3-5 years of a project account for more than half its undiscounted cash flows, it won’t be very sensitive to long-term uncertainties, nor would a company made up of the aggregation of many projects with this characteristic. This is even truer of shale gas and tight oil projects, which yield faster returns and decline more rapidly.

I can’t speak for Wall Street's oil and gas analysts, but I’d be surprised based on past experience in the industry if the risk of a 10% or greater drop in global demand for oil or gas in the 2030s would have much of an effect on their price targets for companies — certainly not enough to qualify as a bubble.

5. Fossil Fuel Share Prices Don’t Already Account for Climate Risks
The assertion of a carbon bubble in fossil fuel assets ultimately depends on investor ignorance of climate-response risks, presumably because companies haven’t quantified those risks for them. To the extent the latter condition is true, it represents an opportunity for companies seeking to capitalize on the boom in sustainability-based investing.

However, you needn’t be an adherent of the Efficient Markets Hypothesis for which Eugene Fama was named as a recipient of this year’s Nobel Prize in Economics to realize that thanks to the Internet, average investors have access to most of the same information on this subject as Mr. Gore and his partners. Institutional investors, who make up the bulk of the shareholding for at least the larger energy firms, and the analysts who follow these companies have the resources to access even more information.

Nor is the idea of a carbon bubble exactly new. Mr. Gore didn't create it, and I’ve been following it for a couple of years, as it took over from waning interest in Peak Oil. It’s not an obscure risk, either, in the sense that sub-prime mortgages and credit default swaps were in the lead-up to the failure of Lehman Brothers in 2008. It’s becoming more mainstream every day, although the burden of proof that this risk is mispriced rests with those advocating this view.

Before concluding, a word of disclosure is in order. As you may gather from my bio, I spent many years working with and around fossil fuels, though my ongoing involvement in energy is much broader than that. As a result of that experience, my portfolio includes investments in companies with significant fossil fuel holdings. I strive for objectivity, but I can’t claim to be disinterested. However, neither can Mr. Gore. As a major investor in renewable energy and other technologies through the firm cited in the article and other roles, he has as much at stake in promoting the idea of a carbon bubble — and on a very different scale — as I might have in dispelling it.

The carbon bubble is an interesting hypothesis, even if I don’t yet find the arguments made in support of it convincing. Despite that, I see nothing wrong with investors wanting to track their carbon exposure, consider shadow carbon prices, or ensure they are properly diversified. However, the biggest risk I see that might eventually warrant considering divestment of fossil-fuel-related assets isn’t based on the merits of this analysis, but on the possibility of creating a self-fulfilling prophesy by means of drumming up social pressure on institutional investors. You might very well think that applies to this Wall St. Journal op-ed. I couldn’t possibly comment.


Monday, November 18, 2013

EPA's Ethanol Adjustment Falls Short of Reform

  • As the ethanol blend wall arrives, the EPA has proposed adjusting downward the federally mandated level of corn ethanol to be blended into gasoline.
  • This would relieve pressure on fuel blenders and retailers, but doesn't solve a problem widely expected to require bigger adjustments each year.
Last Friday the US Environmental Protection Agency proposed significant adjustments to the 2014 Renewable Fuel Standard, the federal biofuel mandate that the EPA administers. The headline change was a nearly 3 billion gallon reduction in the required biofuel volume for next year. However, as various observers, including the editors of the Washington Post, failed to differentiate, less than half of that reduction was truly discretionary. The remainder was a necessary acknowledgement of the persistently slow pace of cellulosic biofuel development and entirely in keeping with precedent.

I've written extensively about the ethanol blend wall and the need to reform the RFS and what that might look like. I don't intend to rehash those issues today. Rather, I'd like to focus on the specifics of the EPA's announcement, and why as the Post stated, "it doesn't go far enough."  Because of the way the RFS targets roll up, it's not easy to see exactly what the Agency has proposed doing with each category of biofuel under the mandate.

The first aspect requiring clarification is that the roughly 99% cut in the most restrictive category of the RFS, the target for cellulosic biofuel, is nothing new. It's at least the fourth consecutive annual reduction by my count, reflecting that the substantial volumes of cellulosic biofuel projected back in 2007 were more than merely ambitious. Several new cellulosic facilities, including plants belonging to DuPont and POET, are scheduled to start up within the next year. I hesitate to call them commercial-scale, not just but their output will be less than that of typical corn-ethanol plants, but because their commerciality can't truly be known until they're started up, de-bugged and running smoothly.

Together with another plant that has already started up, these facilities will still not come close to producing the 1.75 billion gallons of cellulosic biofuel originally mandated for 2014. For the first time, though, EPA's newly revised range of 8-30 million gallons might prove realistic.

Because the RFS's "cellulosic" category rolls up within the larger, less-restrictive "advanced" biofuel category, it wasn't obvious that the effective new 2014 target for non-cellulosic advanced biofuel, which includes biodiesel, as well as ethanol from sugar cane, actually represents a modest increase from 2013 and essentially no change from its original level of 2 billion gallons.

The only truly discretionary change in the EPA's proposal falls on the least-restrictive RFS category of "renewable biofuel." As a result, the 2014 mandate for ethanol produced from corn and other grains would be cut from 14.4 billion gallons to 13.01 billion gallons--the most important figure in the entire proposal and one you won't find in the EPA's press release. 2014 US gasoline sales are expected to be just sufficient to absorb that quantity of ethanol without exceeding the 10% blending limit in place for most US gasoline, other than E85 and the literal handful of stations selling E15, the EPA's approved 15% blend. This reduction represents a milestone and should be welcomed by consumers worried about the cost and quality of the fuel they buy.

The corn ethanol industry is understandably displeased with this proposal, which makes it clear that when push comes to shove, the EPA's preference is for more advanced biofuels over corn ethanol. But the bigger issue is the one to which the Washington Post's editorial alludes: a one-year fix cannot address the structural problems of a rule that is on a trajectory to diverge farther from its planned version of the future with each passing year.

The outcome is far from settled. The EPA's 60-day comment period is just beginning, and numerous legislators, trade associations, and companies will want to have their say about it. They should hear from ordinary consumers, too.

Thursday, November 14, 2013

Will Self-Driving Cars Revolutionize Vehicle Efficiency?

  • Innovators are developing the systems necessary for cars to drive themselves. Some, including Google, have already staged impressive demonstrations.
  • However, synergies with alternative fuels appear modest, and the largest efficiency gains from self-driving cars are likely to be deferred until they dominate the market.  
Self-driving cars, also referred to as autonomous cars, have been in the news for several years. Interest in them spiked in September 2012, when Google announced it would make the technology available to the public within five years. Yet while this could be revolutionary in many ways, the most relevant question for us here concerns their potential to reduce transportation energy demand. At this point the likely effects of self-driving cars on fuel consumption and fuel choice appear less spectacular and more uncertain than their other selling points.

Although the entire concept of a self-driving car might seem science-fictional, it shouldn't greatly surprise anyone who has reflected on the implications of drone aircraft, GPS, smartphones, and the increasing electronification of average cars for the last several decades. From that perspective, the most important constraints on their emergence probably depend less on technology than on social and regulatory factors.

The development of self-driving cars and their precursors has been embraced by some of the biggest names in the global automotive industry, including GM, Toyota, Audi, BMW, Volvo, and Nissan, which announced plans to make the technology available across its entire product line sometime in the next decade. (Nissan also recently reported that its EV sales are lagging years behind plan.)

Suppliers to the OEMs are also making important contributions. I vividly recall driving a car equipped with radar adaptive-cruise control and other then-cutting-edge safety features in city traffic at the 2009 D.C. Auto show, courtesy of Robert Bosch, LLC. All I had to do was tap the gas pedal to engage the system and then steer, while the car did the rest. Systems like this are already appearing in production models.

The two main ways in which self-driving cars could affect future transportation energy usage involve making the operation of vehicles more efficient and enabling bigger changes in vehicle design than would otherwise be feasible. Some of these benefits would start to accrue from the day the first autonomous car left a dealership, but most would require either a critical mass of such cars in the fleet, or overwhelming dominance of the fleet. That could happen sooner in fast-growing developing countries, where legacy fleets are smaller, than in the developed world.

Consider operational changes first. Highway fuel economy could be improved by 20% by means of "drafting"--one car using the car ahead to reduce wind resistance--in automated , self-organized "platoons" of multiple cars. This, together with the avoidance of collisions, would also reduce traffic congestion, variously estimated at costing up to 2.9 billion gallons of fuel each year in the US, or up to 2% of US gasoline demand. The combined potential of these savings, assuming 100% market penetration of autonomous cars, might reach 10 billion gallons per year, a quantity larger than the gasoline displaced by corn ethanol in the US.  Of course achieving such savings depends on having large numbers of self-driving cars on the road; imagine the risks if a daring driver in a conventional car attempted to join a platoon of tightly packed autonomous cars.

The efficiency gains from unattended autonomous parking don't require critical mass, and they might be significant, especially in congested urban areas, where one study suggested parking consumes up to 40% of gasoline used. However, most of these potential fuel savings could also be achieved through simpler and more easily implemented means, such as parking-space sensors and smartphone apps. And while self-driving cars might make car-sharing more popular, fewer vehicles wouldn't automatically translate into less fuel consumption if the same or more miles are driven.

The second major category of energy savings is associated with structural changes made possible by self-driving cars, mainly resulting in smaller and lighter vehicles. If cars no longer collided with each other or with inanimate objects, they wouldn't need to be nearly as robust. Saving weight saves lots of fuel. Yet it's hard to see how this process could begin before autonomous cars reached nearly 100% market penetration, since for many years they must share the road with millions of cars driven by fallible humans.

Nor is it obvious that self-driving cars would be infallible. We've already seen ordinary models exhibit random self-starting, due to malfunctioning of remote starter systems that would make up just one small subsystem of an extraordinarily complex self-driving architecture.

Some have suggested that the downsizing and weight savings facilitated by autonomous cars would hasten the adoption of battery-electric cars. The cost of today's EVs is driven largely by battery size, which is in turn a function of the vehicle's weight and its desired performance. A smaller, lighter car could make do with a smaller, cheaper battery pack. Cheaper EVs might well sell faster. However, if that must wait until enough self-driving cars are on the road for downsizing and radical lightening to become safe, it's a reasonable bet that improvements in battery technology in the intervening decades will have largely bypassed this potential benefit.

In the interim, while there might be some less-significant synergies between EVs and autonomous vehicles, neither technology is likely to depend on the other for its attraction to potential buyers. Nor do I see any obvious benefits from self-driving cars for helping alternative fuels like CNG, LNG or biofuels to gain market share.

On balance, if the average medium-term unique fuel savings of self-driving cars are limited to the 10-15% that I calculate--impressive but not game-changing--then  the opportunities to improve safety and driver productivity seem like much more important motivators for this technology, for now. I also discovered a fair amount of skepticism about how soon fully autonomous cars would be widely acceptable to both consumers and regulators. Today's energy concerns might look quaint by the time such cars arrive in sufficient numbers to have a meaningful impact on them.


Thursday, November 07, 2013

Energy Security Four Decades After the Arab Oil Embargo

  • The Arab Oil Embargo of 1973-74 focused our attention on energy security and set in motion drastic changes in the way we produce, trade and consume energy.
  • With US energy output approaching or exceeding 1970s levels, some experts now advocate prioritizing competition from non-petroleum fuels over reducing oil imports.
Forty years ago this month the United States and other Western countries experienced a new phenomenon as an embargo on oil deliveries from a group of the world’s largest oil exporters took effect. The embargo was a response to the military support that the US and some of its allies were providing to Israel during the Yom Kippur War then underway in the Middle East. A recent session hosted by the US Energy Security Council commemorating these events included a fascinating conversation between Ted Koppel and Dr. James Schlesinger, US Secretary of Defense at the time of the embargo and later the first US Energy Secretary.

The other, related purpose of the meeting was a presentation and discussion on the proposition that fuel competition provides a surer means of achieving energy security than our pursuit of energy independence for the next four decades following the Arab Oil Embargo. This idea warrants serious consideration, since energy independence, at least in the sense of no net imports from outside North America, is finally beginning to appear achievable.

The 1973-74 embargo was the first oil shock of a tumultuous decade, and it triggered a true crisis. The US had relied on oil costing around $3 per barrel (bbl), not just to fuel our transportation system, but also for 17% of our electricity generation and numerous other uses. The US was then one of the world’s largest oil producers but required imports comprising about one-third of supply to balance our growing demand. With the sudden loss of over a million barrels per day of oil imports from the Middle East, and lacking the sort of strategic petroleum reserve that was established a few years later, an economy already battling inflation was tipped into recession.

The embargo rattled more than the US economy; it challenged basic assumptions of American life, including our sense of entitlement to cheap and plentiful gasoline. Before the oil crisis, gasoline prices hovered around the mid-30-cent mark, with occasional local “gas wars” taking the price down to the high-20s--the inflation-adjusted equivalent of $1.60 per gallon now. Of course with average fuel economy around 13 miles per gallon, the effective real cost per mile wasn’t necessarily lower than today’s.

Within a year gas was over 50¢ at the pump, and by the end of the decade it passed $1.00/gal. for the first time. The gas lines that resulted from the unexpected supply shortfall and the federal government’s efforts to limit the ensuing increase in prices were an affront to drivers, a category that encompassed most of the over-16 population.

That first oil crisis and the subsequent energy crisis resulting from the Iranian Revolution in 1979 set in motion a number of important changes, including a sharply increased focus on energy efficiency, a deliberate effort to diversify our sources of imported oil, a pronounced shift away from oil in power generation — to the point that it now makes up less than 1% of US power plant fuel — and the beginnings of our search for affordable, renewable alternatives to oil.

The US Energy Security Council is an impressive group that includes many former government officials and captains of industry. They’ve clearly spent a lot of time studying this issue, and their report is worth reading. As I understand their conclusions and recommendations, they regard high oil prices as a bigger risk to the US economy than oil imports, per se, because of the impact of oil prices on consumer spending and the balance of trade. They have concluded that the most effective way to apply downward pressure on prices is not simply to reduce US oil imports, but to introduce meaningful fuel competition into transportation markets, where oil remains dominant with a share of around 93%.

The group doesn’t dismiss the benefits of increasing US oil production from sources such as the Bakken, Eagle Ford and other shale formations, but because these are relatively high-cost supplies, they have concluded that their leverage on global oil prices is limited. That means that higher US oil output couldn’t provide a path back to the price levels that prevailed before the Iraq War, when West Texas Intermediate crude averaged $26/bbl in 2002 and gasoline retailed for $1.35/gal.

This is a reasonable argument, though it’s worth considering that a return to $75/bbl might be feasible, if US production kept rising. That could yield US retail gasoline prices around $2.75/gal., equating to $2.15 in 2002 dollars. This isn’t as far-fetched as it might seem, because the global oil price is determined not by the entire 90 million bbl/day of world supply and demand, but by the last few million bbl/day of incremental supply, demand, and inventory changes.

The Council’s view also appears to emphasize the direct impact of oil prices on consumer spending without recognizing that rising production and falling imports shield the economy as a whole from the worst effects of high oil prices. With oil’s contribution to the trade deficit shrinking steadily, the main impact of higher oil prices is to divert money from consumers to shareholders of oil companies — of which I should disclose I am one. While exacerbating income inequality, that should at least result in a smaller impact on GDP and employment than the combination of rising oil prices and rising imports.

If the discussion had stopped at that point, the meeting would have been just another interesting Washington gabfest. However, the group’s analysis includes a set of actions it has identified as necessary for achieving their desired outcome: US energy security extending beyond the current US oil boom, underpinned by an expanding unconventional gas revolution that is widely expected to last for decades.

Their recommendations include giving fuels like methanol derived mainly from natural gas the chance to compete with gasoline made from oil, and with biofuels.They would start with revisions to the current US Corporate Average Fuel Economy standards to give carmakers incentives — not cash subsidies or mandates — to make at least half of all new vehicles fully fuel-flexible, capable of tolerating a wide range of blends of methanol, ethanol and gasoline. That seems like a no-regrets approach that could be achieved at a very low incremental cost per car. Even if you never bought a gallon of E85, M85, or M15, it could pay for itself by protecting your car from the damage that might result if you inadvertently filled up with gasoline containing more than the 10% of ethanol that carmakers believe is safe for non-flex-fuel cars. Other recommendations include easing regulations for retrofitting existing cars for flex-fuel and forming an alcohol-fuels alliance with China and Brazil.

Yet while I repeatedly heard that the group wasn’t promoting any single fuel, talk of methanol dominated the conversation. The moderator, Ann Korin, even joked that the session sounded like an “alcohol party.” As I later pointed out to her, there wasn’t a single mention of drop-in fuels — gasoline and diesel lookalikes derived from natural gas or biomass. I regard that as a crucial omission, because such fuels would be fully compatible with the billion cars already on the road, rather than just the 60 million or so new cars produced each year. They could provide greater leverage on oil prices by producing pipeline-ready products with which consumers are already familiar, from sources other than crude oil.

Part of the appeal of methanol seemed to be the potential for producing it from shale gas at a cost well below the cost of gasoline, even on an energy-equivalent basis — an important caveat, because a gallon of methanol contains half the energy of a gallon of gasoline. I hear the same argument in support of various pathways for producing jet fuel from non-oil sources, and it subscribes to the same fallacy: that market prices are set by manufacturing costs rather than supply and demand.

Fuel is a volume game. For a non-oil gasoline substitute to drive down oil prices –and thus motor fuel prices– as far as the Council apparently envisions, it would take at least several million barrels per day, on an oil-equivalent basis. Producing six million bbl/day of methanol from natural gas would consume 20 billion cubic feet per day of it. That’s 30% of last year’s US dry natural gas production, requiring 100% of the Energy Information Administration’s forecasted growth of US natural gas production through 2034. A number of other entities have their eyes on that same gas for other applications.

As many of the speakers at the Energy Security Council event reminded us, the world is a very different place than it was in 1973. Among other changes, US energy trends are headed in the right direction, with oil demand flat or declining, production rising and imports falling. That alone makes us more energy secure than we were, either five years ago or in 1972. Future oil supply disruptions are also unlikely to look much like the Arab Oil Embargo.

The Council is certainly correct that our unexpected shale gas bonanza, producing large quantities of new energy at a price equivalent to oil at $25 or less per barrel, provides a unique opportunity to weaken OPEC’s influence on oil prices. In pursuing that goal, however, it’s essential to remain flexible concerning the best pathways for gas to compete in transportation fuel markets, whether as CNG or LNG, or through conversion to electricity, methanol, or petroleum-product lookalikes. Consumer acceptance could prove to be the biggest uncertainty governing the ultimate outcome.
