Industry, Energy, and the Moral High Ground

Originally published in Flourishing Mar Apr 2013

I was watching television last night (March 26), when I was disturbed by a news item scrolling across the bottom of the screen.  Paraphrasing, the message was that the U.S. State Department will open new hearings on the Keystone XL pipeline project on April 18.  Huh?  I thought Hilary’s State Department had given President Obama clear passage to a decision on Keystone XL way back in 2012, long before the election.   And, I thought I’d read not long ago that the EPA Administrator was planning to resign, because she thought the President was going to approve the Keystone XL project.  So I checked, and my memory was correct.

This is why central planning and heavy-handed regulation don’t work; or perhaps I should say they don’t work for the American people or for economic progress.  We all know intuitively, I think, that political calculations in Washington more or less continuously trump reason and reality.  So, I’ve never understood how we get suckered into the belief that patently demagogic politicians and their swarm of camp followers can make better economic, environmental, and public safety decisions than the often brilliant and generally hard-working people who strive every day to offer life-enhancing products to increasingly discerning customers for a profit.  The historical evidence and our own life experience is virtually all to the contrary.  

We in the western world are the beneficiaries of the greatest development in human history—the Industrial Revolution—which enabled higher human productivity, more leisure time, faster and safer transportation, more complex scientific discoveries, safer and more comfortable places to live, and longer lives, to name just a few of its benefits; and left in its wake the Information Revolution and the emerging Biological Revolution. 

So, instead of trusting everything to the posers in Washington, I think we might want to once again embrace the free market principles that gave us that Industrial Revolution.  We could start, for example, by stopping the endlessly redundant nit-picking of every industrial project for the remote, one-in-a billion chance that somewhere, sometime, somehow, a pipeline will rupture and leave a temporary stain the size of a football field in some farmer’s patch of corn.  I mean no offense to the farmers, but do we think that the aggrieved farmer—who does retain his property rights—will not be recompensed, contractually or through the courts?

But wait, didn’t I also hear on the news yesterday that a Canadian freight train had derailed in Minnesota, spilling oil in a farm field?  Maybe we should weigh that all but trivial event—which I’m sure captured the President’s attention—against the incalculable human benefits of petroleum-based energy.  And, if you please, I’ll include nuclear and coal-based energy in my argument, too.

Really, it should be a moral embarrassment to us that in today’s world, millions of people die every year due to a lack of dependable energy supplies.  Isn’t it amazing that we environmentally aware, creature-sensitive Americans have cordoned off centuries worth of potential energy supplies in the form of natural gas, nuclear power, oil, and coal in the name of  “saving the planet”.  Rather than promote a better quality of life for desperate human beings throughout the rest of the world—which we could readily do at great economic, cultural, and moral benefit to ourselves—we instead celebrate, as  moral idealism, battery-powered cars with a driving range rivaling the distance of Tiger Woods’ 6 iron; and sorting through trash to put everything in its proper bin.  That’s a pitifully vapid—not to say inverted—path to moral self-esteem, don’t you think?

I’ve been watching this nonsense and remaining mostly silent for upwards of forty years.  But, yesterday I read something that was said by the greatest cultural icon of the 20th century in America:  Our lives begin to end the day we remain silent about the things that matter.   So—not to offend or debate, but to educate—my self-imposed muzzle has been removed.  (I know that you know that I write to you out of love; and if you’re not convinced by my argument, that’s ok.  I won’t hold it against you, and I’d appreciate the same consideration.)

We Americans have taken industrial and material progress for granted, and we’ve carelessly embraced “going green” as a moral ideal–expecting that the unprecedented standard of living we’ve enjoyed would continue.  For forty years, we’ve permitted relatively small, but politically connected and well-funded, groups of anti-industrial environmentalists to roadblock new energy production and industrial development at nearly every turn.  Some call them “tree-huggers”; but since I love trees—just as I value the clean air and clean water,  which are available only in the most energy–intense industrial economies—I just say they’re wrong.   Since policies have consequences, we’re paying the price for the government’s stifling of innovation, productivity, and growth in the energy industry with nearly nationwide economic stagnation and fruitless “green energy” cronyism.   “Going green” is doing more damage to our moral and economic future with every day that passes. 

If we freedom-loving, prosperity-seeking people continue to grant the anti-industrialists the moral high ground they claim to represent with their “green energy” agenda, they may continue to inspire support for their “green economy” suicide pact.  But, don’t miss my main point:  To sacrifice the modern human environment we enjoy here in America—fueled by petroleum, nuclear, and coal-based energy—to the non-human environment, as the anti-industrialists insist we do, is not just bad economic policy, it is immoral.  A mere moment’s reflection on the living conditions that exist in the non-industrialized world is evidence enough of that fact.  So, do we want to live like they do?  Or do we want to help them live like us?  Because those are our choices. 

The anti-industrialists like to talk about “industrial policy” by which they mean the obstruction of private industry initiatives and the demise of the large-scale energy production our modern economy requires.  The only industrial policy we really need to assure ourselves of a healthy environment, and to restore prosperity and abundance, is one which respects private property rights and individual self-determination.  As the history of western civilization since the beginning of the Industrial Revolution has demonstrated, human ingenuity and the natural human desire to create better lives for ourselves and our families will take care of the rest. mh

All of Them

Originally published in Flourishing November/December 2012

As recently as 2005, the annual average price of natural gas in the U.S. was $8.81 per thousand cubic feet (mcf)1; and gas ended that year at the astronomical price of $13.05 per mcf.  In September 2012, the cash price for natural gas was $3.52 per mcf.2  For American job-seekers, this trend could be a game-changer.

And, not that long ago, the bullies in Russia and Iran imagined they were going to corner the world market for natural gas.  Even now, there is an omnipresent threat of politically motivated supply shortages throughout Europe.  That situation may be about to change, too.

The short explanation for these possibilities is that investment in oil and gas exploration and development has exceeded $1.5 trillion in just the last three years3.  Much of that capital outlay has gone into various shale formations throughout the U.S., including the Mississippian Lime that underlies Cowley County.   

The somewhat longer explanation is that with persistent research and field experimentation in the 1980’s and 1990’s, George Phydias Mitchell, the son of an immigrant Greek sheep herder, developed technologies for drilling into shale formations horizontally, and then fracturing the rock so that oil and natural gas could flow into a concrete-sealed, steel-lined well-bore, and rise safely to the surface.4 It was largely as a result of Mitchell’s work that so much capital was attracted to shale development and hydraulic fracturing.  Mitchell sold his company to Devon Energy in Oklahoma City for $3.5 billion in 2002.

In 2011, the U.S. became a net exporter of oil for the first time since 1949.5  Within a few years, we may become the world’s biggest natural gas exporter; but that depends on the approval and completion of liquefied natural gas (LNG) export terminals. 

You might ask yourself, “What about European oil companies?  Can’t they do the same thing?”  Maybe they will, someday, but what makes North American shale formations viable as new sources of energy isn’t just geological or technological.  It’s also philosophical.  American entrepreneurial energy, which in this case is a by-product of private ownership of the means of production, including land, equipment, and mineral rights, is a critically important factor.  Julio Friedman, chief energy technologist at the Lawrence Livermore National Laboratory in California, sums it up nicely, “The mineral rights, the availability of small players to enter the market, the availability of geological data, these things are all part of an entrepreneurial model that is unique to the United States.”6

(Incidentally, the first commercial use of hydraulic fracturing occurred near Hugoton, Kansas in 1947.  The best illustration of the fracturing process that I’ve seen is at http://www.devonenergy.com.)

Incentivized by George Mitchell’s success, American oil companies have recently discovered (or rediscovered) and begun to develop more than twenty different shale formations in North America, each with more than 20 billion barrels of recoverable oil7; and, according to the U.S. Energy Information Agency (EIA), nearly one quadrillion cubic feet of natural gas. Thanks to these discoveries, North America could increase its production of oil and natural gas liquids from 15 million barrels per day (b/d) in 2010 to as much as 27 million b/d by 2022.   That would be an increase of 80% in just twelve years.  The U.S. may become the world’s largest oil exporter as early as 2017.8 

Why is this important?  It’s not because it makes us “energy independent”.  It doesn’t.  But, follow me closely, because the potential is much bigger than that:

In the fantasy world of Keynesian9 economics, it is believed that if the government will create sufficiently large budget deficits (stimulus packages), and if the Federal Reserve will print enough money to buy the government’s bonds to keep interest rates low; then jobs will be created, the economy will grow, and everyone will be fat and happy. 

But, we’ve repeatedly seen what those policies really produce: Corruption and carelessness in banking and on Wall Street; rampant mal-investment and cronyism in government programs; credit crises; and inflation. 

So, what does stimulate job creation and real economic progress?  The answer was provided by French economist Jean-Baptiste Say more than two hundred years ago:

“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of creation of one product immediately opens a vent for other products.” 10

In economic science that’s called Say’s Law.  It’s often misrepresented and derided by those who think that deficit spending and the Federal Reserve printing press can create wealth.  But you, and I, and the Little Red Hen11 know—as Say’s Law suggests—that if one wants to reap a bountiful harvest, one must actually plant and nurture a fertile seed.  And, that is precisely what America’s oil industry entrepreneurs have done—in spades.  Thanks to their tireless efforts and their colossal investments, we’re seeing lower energy prices, a rebound in manufacturing, a cleaner environment, and thousands of good new jobs.   

Consider, for example, that companies as diverse as GE and Cummins are now partnering with smaller companies to develop products for the emerging natural gas transportation market.  And, why wouldn’t they?  Natural gas is now $1.50 to 2.00 per gallon cheaper than gasoline or diesel.  Natural gas refueling stations are springing up all across the country, and as many as one thousand commercial truck fleets are already sporting natural gas engines.12  (Paul Abram of Abram Ready Mix in Beloit, my friend and former employer, just sent me an article from Heavy Duty Trucking magazine, which shows Ferrara Brothers Ready Mix of New York City, using trucks powered by Cummins’ compressed natural gas (CNG) engines to deliver concrete to the World Trade Center.)

Then, there is the matter of electricity generation.  In previous issues of this newsletter, I’ve touched on the  lousy economics of solar and wind power, but natural gas is also making changes in the electric utility industry by driving down the demand for coal.  In 2004, natural gas provided for less than 18% of all electricity generation in the United States, while coal accounted for nearly 50%.  In 2012, natural gas will provide for more than 30%, and coal will provide for less than 38%.13   I wouldn’t write coal off completely, though. It’s still a plentiful, inexpensive, and with the latest technology, clean source of energy. 

Natural gas is not just a fuel, it’s also a key ingredient in many chemical manufacturing operations.  Chevron Phillips Chemical Company (a joint venture of Chevron and Phillips Petroleum) is planning to spend $5 billion to build a new, state of the art ethylene plant in Baytown, Texas, along with two polyethylene plants and related infrastructure.  According to the company’s executive vice-president Mark Lasher, the chemical industry is likely to spend up to $30 billion on such plants in the next few years.14  Confirming this, Dow Chemical has announced that it will build a new ethylene plant in Freeport, Texas, spending more than $4 billion and creating 2,000 new jobs.15.  Most of the remaining $20 billion or so will likely come from Sasol Limited, Formosa Plastics Corporation, and Royal Dutch Shell. I expect many more such announcements.

According to a report by the global research combine IHS-CERA, posted on the Exxon/Mobil website16, there were 37,000 new jobs created directly by the oil and gas industry in 2011.  That activity drove the creation of another 111,000 new jobs in industries that serve the energy producers.   But that only  begins to tell the story.  The technological transformation of the energy industry, led by the horizontal drilling and hydraulic fracturing innovators, couldn’t have been predicted, or even believed, as recently as ten years ago.  Yet today, the “unconventional” gas and oil industry employs, directly and indirectly, more than 1,300,000 Americans.  The average starting salary for petroleum engineers, for whom demand is rising, is now $79,000 per year.

As a further demonstration of Say’s Law, it might be interesting to discover how many jobs are ultimately made possible by the production of oil and natural gas.  With a moment’s reflection, you’ll probably realize that you don’t need a calculator or a degree in labor economics.  The answer is: All of them.  That is the reality of today; and it’s our assurance—if we will let it be—of a prosperous tomorrow.  mh

**************

Notes:

1.  U.S. Energy Information Agency (EIA).

2.  Ibid., EIA

3.  Citi/GPS, Energy 2020: North America, the New Middle East? 2012, p 3.

4.  http://newsok.com (Mitchell, who was born in 1919 in Galveston, graduated first in his class from TexasA&M.University.  He served in the U.S. Army during WWII, attaining the rank of Captain.)

5.  Oil: The Next Revolution, Leonardo Maguerri, Belfer Center, Harvard Kennedy School, 2012, p 20.

6.  CTIT/GPS, Energy 2020.

7.  Ibid., Maguerri

8.  Ibid., Citi/GPS

9.  Refers to Lord John Maynard Keynes, whose 1936 book, The General Theory of Employment, Interest, and Money,  has corrupted the science of economics for three generations.

10.  J. B. Say, A Treatise on Political Economy, 1803; available in PDF at http://www.econlib.org/

11.  The Little Red Hen is a children’s story, popularized in the 1940’s and 1950’s, emphasizing personal initiative and a work ethic. Truly a classic.

12.  http://www.marketwire.com

13.  http://www.bloomberg.com

14.  http://www.downstream.com

15.  Ibid.

16.  http://www.exxonperspectives.com

A Brief Economic Update on Oil

Originally Published in eFlourishing Issue 10, May 30, 2010

The theory of “Peak Oil”, like the theory of “anthropogenic global warming”, is, I believe, factually unsustainable. Both theories conveniently discount the scope and effects of natural phenomena and the unlimited potential of the liberated human mind. Fortunately, as Mrs. Cunningham taught her history students nearly fifty years ago, the truth will out. According to a recent Gallup poll (http://www.gallup.com/poll/126716/Environmental-Issues-Year-Low-Concern.aspx) , the number of people who take “Global Warming” seriously has fallen to 28%. “Peak Oil” is headed for the dust-bin of science, too.

Oil production increased in the Gulf of Mexico and North Dakota last year. Those increases more than offset declines elsewhere in the U.S. for the first annual increase in U.S. oil production since 1991. The U.S. Energy Information Administration (EIA) reported in its March 2010 Short-Term Energy Outlook that U.S. oil production in 2009 averaged 5.32 million barrels a day, up from 4.95 million in 2008. That’s an 8% increase.

Several weeks ago, a subscriber/client sent me a link to some information about the Bakken Formation in North Dakota. I checked it out. According to a 2008 report by the U.S. Geological Survey, Bakken could increase technically recoverable reserves by up to 4 billion barrels. Though newsletter and stock promoters often exaggerate the potential of the Bakken Formation, the recent EIA Outlook shows that Bakken does add significantly to production. The increases in production in both the Gulf of Mexico and North Dakota’s Bakken Formation show – yet again – how oil company investments in rapidly developing technology can increase both known reserves and current oil production.

As the economist Dr. Reisman reminds us, from its surface to its center – a distance of four thousand miles – the Earth is nothing but a solidly packed ball of natural resources. Even with the scientific and technological progress we’ve made during the 150-year history of the oil industry, we’ve succeeded in drilling in just a few places to a depth of only about seven miles – a pin prick.