Desperate Times for Big Oil
NEW YORK ( TheStreet) --These are desperate times for Big Oil.
Fracking (which involves shooting water and sand into a wellhead, at high pressure, fracturing the surrounding rock) brings enormous profits, but anyone can frack. The price of natural gas has rolled over. The price of oil seems poised to follow.
If the oil industry lobbyists were smart, they would start funding international environmental groups, in order to limit the growing supply. Fracking opens up enormous new fields that were previously untapped, like North Dakota's Bakken field. And it's giving new life to old fields, like Texas' Permian Basin.
Now, what happens when fracking goes international? What happens when the Russians start fracking, when the Mexicans figure out how to do it, when the Saudis do it? Oilpatch margins face a big squeeze.
Maybe we can deal with that. Standard Oil, the Texas Railroad Commission, and OPEC were all, in their way, efforts to manage supply against demand, and to maintain prices. Something like these mechanisms could come back for non-OPEC countries, like the U.S.
But here is the nightmare. What would really put a permanent thumb down on oil prices, creating a new era of energy abundance? Renewable energy. The sun shines, the wind blows, the tides roll, the crops grow and we live on a molten rock. It's the pressure of that rock that turned dinosaur bones into gas and oil in the first place -- what if we could speed up the process?
We can. We are. Solar energy already costs less than what comes from the electrical grid in many places, and that reach will only grow because solar's costs are declining. But it's still hard to put the Sun in your gas tank, no matter what the old Sunoco ads said.
Thus, ethanol. Gasoline is structurally similar to alcohol, diesel fuel similar to cooking oil. The simplest way to produce alcohol and cooking oil is with food crops. The sugar mountain the U.S. Department of Agriculture is trying to work off, can be put into our gas tanks. Brazil does it . Apparently there is a sugar surplus; the government may buy up 400,000 tons of it to keep supply low -- and prices high, reports say.
Competition, of course, works both ways. Last year's bad harvest means higher ethanol prices, and less supply, just as higher requirements for ethanol kick-in. The Renewable Identification Numbers, or RINs, needed to stay ahead of this law have become a target of speculation, raising prices at the pump, and causing refiners to consider more exports to get around the law. There is a big push for the elimination of RINs and all ethanol subsidies.
But will that really have any effect on the price? There are lots of ways to keep prices high, if you don't face competition from other sources. We saw it this past winter, when refinery "outages" and an early move to summer fuels caused gas prices to spike in February. There are lots of places to manipulate the petroleum market -- oil, refining, delivery -- and there is, as yet, no incentive to lower prices.