All Things Considered – May 2012

Remember all that stuff about peak oil? Remember when we were running out of the black slippery stuff? Remember when we had just three options – risking nuclear meltdowns, putting windmills on top of solar panels, or freezing in the dark?

Forget about it.

Natural gas is so plentiful the CEO of Shell was on television recently talking about building a Liquefied Natural Gas (LNG) export terminal on Canada’s coast and preparing to propose a similar terminal for the U.S. It was only a few years ago companies were talking about building import terminals.

Meanwhile, thanks to new technology, “drill baby drill” became a reality rather than just a bumper sticker. The U.S. is now the second largest non-OPEC oil producer on the planet after Russia and Canada is number 3. Most startling is that this current oil boom has just begun. As Canadians we all know about the huge volumes of oil in the oilsands.

What we seem less aware of are the immense amounts in shale that are just beginning to be tapped.

There are even some old, supposedly tapped out, oilfields that are being re-awakened by new technologies and are pumping again. This has created some problems, though not the problems we might have expected four years ago.

For example, some of the pipelines aren’t in the right places and if there is one it may not be big enough to handle all this new oil.

But even if the pipeline capacity were in place there is more oil than America’s refineries can handle. It can also be argued that many of the refineries are in the wrong places given the new sources of supply. Many of the refineries were built to handle imported crude that came in by ship. Now you might want them in Colorado, North Dakota and maybe even another one in Saskatchewan.

The logistical and refining problems are one reason gasoline prices are high. The other reason is fear. Despite North America’s newfound oil wealth, oil is an international commodity and prices are set on a world market. That market is fearful. The Middle East is, to say the least, unsettled. Ongoing concerns with Iran, continuing troubles in Iraq, and worries that the instability in Syria might spread are just a few of the underlying fears.

So, you put political worries into a pot containing plentiful North American supplies, stir distractedly, and you get a North American crude price (West Texas Intermediate WTI) running about $20 a barrel under the world price (Brent crude). But at $106 a barrel and rising WTI still isn’t cheap and gasoline is expensive.

The U.S. oil boom may have an impact on Canadian oil policy. For years, Canadian plans for the oilsands included shipping the oil south to a seemingly insatiable U.S. market. With all its new production coming on line, the U.S. isn’t likely to be that insatiable in the future. As a consequence, Canada has started to look to China and building a pipeline to the Pacific. While there are a lot of geological, geographical and political hurdles, it seems inevitable.

Does all this oil and cheap natural gas spell the end for green energy? Not really. It likely does mean that development will slow and that the really high feed-in tariffs paid when it seemed we were running out of oil and natural gas will come down a lot. But some solar projects still seem to make sense.

For example, the British NFU recently did a study that showed that British poultry producers could earn a real return of about seven per cent a year by installing solar panels. That seven per cent is without any subsidies on either the capital cost or through a high feed-in tariff. Whether that seven per cent applies in Canada depends upon where you live. In Quebec and Manitoba electricity is cheap and going solar might be a losing proposition unless there are subsidies involved. But elsewhere it could make sense. For example, the price paid for electricity in Ontario seems roughly equivalent to what is paid at the barn door by users in Britain. (Comparing the prices can be a challenge if you get lost in the details because the bills and charges are formatted differently. But if you go – literally – to the bottom line, the amount the electricity user pays is about the same.)

Meanwhile in the newly oil and gas rich U.S., Renewvia Energy Corp. has announced it is building a 200-kilowatt solar energy system on a poultry farm in Georgia. The system is expected (on a net basis) to supply all of the farm’s electricity needs. When the farm produces a surplus the power will be sold to the regional utility for $.12 per kilowatt-hour.

The bottom line is that the energy situation in North American has gone in a direction opposite of that which was expected just four or five years ago. We’ve got lots of oil, lots of natural gas and green energy has become so efficient that it still makes sense in some circumstances.