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EPRINC studies energy economics and policy issue with special emphasis on oil, natural gas and petroleum product markets. We provide objective and technical analysis on a wide range of energy issues.

Chart of the Week

Regulatory Credit Contribution to Tesla’s Automotive Gross Profits

The sale of regulatory credits represents about 10-30% of Tesla’s gross profits in the automotive segment, and in FY2023 was equivalent to a $990 premium on every vehicle sold. In the first three quarters of 2024, regulatory credits have already provided over $2 billion in revenue to Tesla.

Like many of our treasured Main Street businesses, the past few years have been hard on these small fuel retailers. However, there may be even more factors pitted against them than other businesses. These factors are being overlooked by our political leaders and mainstream press. EPRINC’s Emeritus President and current Trustee Larry Goldstein briefly offers some explanations. His piece can be found here.

The Strategic Petroleum Reserve is in the news as President Biden announced a release of 50 million barrels into the market.
For those of you interested in all things about the Strategic Petroleum Reserve click on the following link.

On Tuesday, November 16 2021, EPRINC President Lucian Pugliaresi participated in a marathon hearing with the House Committee on Energy and Commerce. Some of the notable comments he made, pulling from EPRINC’s research on the ongoing energy transition, are listed below. In addition, the full testimony with charts is here and a video of the hearing in its entirety can be found here.

1. The Energy System is highly complicated, inter-connected regionally and globally in ways that are not always apparent. The energy transition presents a new set of supply and price risks for consumers and manufacturers. Fully implementing an energy transition over the next 30 years is neither easy nor can it be assured.

2. Achieving net zero in the developed world will reduce carbon emissions by only a small amount, likely no more than 20 percent of expected global emissions.

3. Regulatory programs as well as private sector commitments to accelerate the energy transition – whether it be mandates, targets, financial and procurement guidelines create uncertainty and financial risks that limit investment commitments to current legacy fuels, many of which are likely to remain in demand for years to come.

4. Most of the recent escalation in energy prices can be tied directly to dislocations in energy supplies (largely oil and gas) from the Covid-19 pandemic. However, government policies, such as the halt on leasing on federal lands, the cancellation of the Keystone Pipeline, the potential cancellation of line 5 from Canada, rising regulatory requirements and permitting delays are all threatening North American oil and gas production. We undermine this strategic asset at our peril if we abandon these fuels before the energy transition is well established.

5. Policy Matters. The US should see the current energy crisis in Europe as a cautionary tale and learn from it.

6. Policy initiatives that seek to accelerate the U.S. to a fully renewable energy complex will have global implications for energy security.

7. The transition will establish new environmental challenges and energy security issues in addition to the old.

The International Energy Agency (IEA), a collection of member countries formed in the 1970s to secure the energy security of the advanced Western democracies, is now calling for a halt to the development of new oil and gas resources as a fundamental strategy for addressing the threats from climate change.  The halt in development is viewed by the IEA as essential for the world to reach net zero carbon emissions by 2050. Michael Lynch, Distinguished Fellow at the Energy Policy Research Foundation, Inc. (EPRINC) points out the risks of such a strategy in his paper entitled Shifting Oil Industry Structure and Energy Security Under Investment Phase-Outs.  Since only private oil companies in the West are likely to respond, future oil supply probably would be dominated by Middle Eastern and Russian oil companies, mostly state-owned. Such a policy initiative, if successfully implemented, will see OPEC and allied producers (OPEC+) share of the world oil market supply rise to over 80% by 2040, degrading global energy security and severely limited the capability of the IEA to implement its Emergency Sharing System in the case of an oil crisis. The publication can be found here.

As the Covid-19 pandemic hit full stride the U.S. and world petroleum markets experienced unprecedented demand destruction in excess of ten million barrels per day. Many policymakers and some industry executives called for import quotas and other measures to disconnect the U.S. from world oil markets. It was a bad and counterproductive idea then and now calls by some policymakers to ban U.S. crude oil exports is an equally bad idea. In the article, Goldstein and  Pugliaresi point out that:
 
“The free movement of capital, crude oil and petroleum products remain critical to sustaining the productive capacity of the U.S. oil and natural gas industry. These efficiencies played a large role in the rapid expansion of U.S. oil production and remain one of the central reasons that large volumes of U.S. crude imports also result in large volumes of higher value added exports of petroleum products. We disrupt these flows at our own peril.”
The article published in Real Clear Energy can be found here.

Throughout much of the developed world, there is a consensus that concern over climate change is leading to a rapid downturn in petroleum use and that petroleum will likely have a rapidly declining role in the world’s energy mix over the next 30 years. However, a rapid energy transition to a world no longer reliant on fossil fuels represents a formidable challenge and a high likelihood remains, especially in the developing world, that petroleum’s important and large contribution to the world energy mix will not be so easily displaced. Recent EIA forecasts show that world oil and gas demand has reverted to trend. Supply requirements for the end of 2022 are likely to exceed 100 million barrels/day, a remarkable recovery from a decline in liquids demands of over 15 million barrels a day in 2020 from the Covid-19 pandemic. Although Venezuelan oil production has been constrained by both technical mismanagement and sanctions, the size of its reserve base documents its potentially important role in meeting future world oil demand.

The timing of Venezuela’s petroleum future depends on whether it can enter the world oil market under traditional commercial conditions. On June 25, 2021, the U.S., Canada, and the E.U. issued a joint communiqué that made clear that a decision regarding the timing and specifics of the sanctions on Venezuela remains the primary determining factor on when and if Venezuela can play a larger role in the world oil market.

Even if Venezuela were somehow to find its way free of sanctions, the road back to higher production will require massive capital investment. Venezuela, which produced over 3 million barrels in day in the 1970s, is now at only 600,000 barrels per day. The authors estimate that the level of investment and amount of time required to rehabilitate the production potential of Venezuela would approach $30 billion USD in two stages:

Stage 1 – Pre-sanctions recovery: An investment of $7-9 billion over 2-3 years to get back to production prevalent before sanctions started in 2017 (about 2 million barrels/day).

Stage 2 – Post-recovery: An investment of an additional $20 billion/year for 2-3 years. These investments would take 4-5 years to yield additional production. This would require investment into offshore and underdeveloped onshore projects to bring them up to full production capacity. With proper investment, Venezuela can sustain a production output of approximately 2.5 million b/d over the next 20-30 years.

The authors provide an overview of Venezuela’s production potential, and evaluate the technical obstacles that must be addressed to restore Venezuelan oil production. Their paper can be found here.

EPRINC held a virtual workshop on The Transport Climate Initiative (TCI): Challenges and Opportunities on June 16, 2021. 
 
EPRINC staff, policymakers, and regional experts explored the effectiveness of the program to meet its goals of lowering greenhouse gas (“GHG”) emissions. Among the topics discussed were how the program fits in with U.S. and international efforts to accelerate the energy transition, an assessment of the program’s impact on consumers, implementation challenges, and opportunities for green investments.   
 
The Transportation and Climate Initiative (TCI) is a regional collaboration of potentially 12 Northeast and Mid-Atlantic states and the District of Columbia seeking to reduce consumption of petroleum-based fossil fuels in the transportation sector and introduce cleaner fuels and more effective transportation systems.  The list of potentially participating jurisdictions are: Connecticut, Delaware, the District of Columbia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, and Virginia.

The agenda for the event can be found here, the presentations that were given are here, and the full video recording of the event is here.

A report on the event was written by Ashutosh Shastri, Senior Advisor, Global Gas Centre & Distinguished Fellow, EPRINC, and can be accessed here.

Colonial Pipeline Hack Highlights Growing Energy Security Risks:

Infrastructure Cyberattacks are a Threat to National Security

The recent hack of the Colonial Pipeline computer systems, which disrupted gasoline supplies to the Northeast has raised a new set of energy security concerns. Although the attack was presumably not the actions of a state entity, it is hard not to view it as an act of terrorism given its potential for widespread disruption. This is not a new threat. In the late 1990s, President Clinton issued Presidential Directive 63 which recognized that growing threats to critical infrastructure had become “increasingly automated and interlinked.” The Directive mandated that within five years (by 2003) critical U.S. infrastructure would be hardened to cyberattacks. Despite the Directive, measures to protect infrastructure from growing cyberattacks have not kept up.

This report was published on RealClear Energy, but the full PDF version of the report can be found here.

The Energy Policy Research Foundation and the Global Gas Centre have jointly hosted a webinar on the “Future of North American Natural Gas In A Carbon-Constrained World.” A group of about 60 industry leaders, researchers, and senior policymakers participated in the workshop on June 3, 2021.

GCC and EPRINC are collaborating on a joint effort to evaluate the role of North American natural gas as governments worldwide undertake efforts to accelerate the energy transition. Among the more important objectives of this joint effort are identifying recent trends and longer-term uncertainties in North American natural gas markets, government and industry initiatives to address GHG emissions and the role of natural gas both in energy markets in North America as well as in the world market as an important fuel source through LNG exports. EPRINC and GCC staff, experts, policymakers, and a cross-section of industry executives continued this discussion on the current state of the North American natural gas market and an assessment of the new regulatory environment.

The agenda from the event is here, and the presentations that were given at the workshop can be found here. A full recording of the workshop can be accessed here.

EPRINC’s Rafael Sandrea has published another paper, this one entitled “With Global Oil Demand on the Rebound, What About Supply?” The piece analyzes the impact of COVID-19 and the Texas Freeze on global oil demand and supply. Rafael also examines future oil supplies moving forward into 2021 by discussing trends in exploration and providing fresh comparative economics regarding oil supply vs. renewables.

 

Rafael’s paper can be found here.

Yin Zou has joined EPRINC as a Distinguished Fellow. She brings extensive knowledge and insights into U.S. and Chinese policies on energy, climate, and renewable energy. Educated in both the U.S. and China, Yin worked in Washington D.C. as a government affairs consultant for APCO Worldwide on clean energy, climate policy, trade, and investment issues. She later joined Tend, a California-based fintech company to successfully launch its mobile app in Asian emerging markets and became a serial entrepreneur passionate about bringing meaningful social change through technologies. Ms. Zou holds a dual M.A in International Relations from Johns Hopkins SAIS – Nanjing University and a Master in International Environmental Policy from American University’s School of International Service. She currently resides in New York City.

EPRINC has hosted the first virtual workshop in its new Energy Security Series series, entitled “Energy Security and the North American Oil & Gas Production Platform.” The recording of the workshop available here.

Initiatives to limit U.S. oil and gas production can be expected in the near future. Are these policy initiatives effective measures to accelerate the energy transition and do they conflict with long-standing measures to sustain American energy security?

EPRINC staff and fellows Ivan Sandrea, Jeff Kissel, Max Pyziur, Michael Lynch, Larry Goldstein, Carmine Difiglio, Glen Sweetnam, and Lucian Pugliaresi as well as Aaron Annabel from the Canadian Embassy, Trisha Curtis (EPRINC fellow, PetroNerds), and Fred Hutchison from LNG Allies provided presentations and commentary on this important topic. Their presentations can be found here. The agenda for the event can be found here.

Recent months have seen a growing crescendo of claims that a peak in oil demand may be near, or even be past. Pandemic-related changes in behavior such as working from home are predicted to persist after the emergency ends, and advances in technology are said to make oil-fueled vehicles increasingly obsolete. Michael Lynch and Ivan Sandrea have examined these arguments in a new study by the Energy Policy Research Foundation and found strong reasons for skepticism. People in post-pandemic China do not show major changes in their behavior and the increasing demand globally for SUVs implies consumers are not focused on reducing emissions. Further, battery electric vehicles perform significantly worse than internal combustion engines in key metrics, whereas the previous transition, from horses to cars, was due to major improvements in range, speed and carrying capacity, as well as convenience.

The primary findings:

  • Many of the forecasts are aspirational rather than predictive, that is, describing what needs to happen to achieve climate goals not what is likely to happen;
  • Forecasters too often presume transient market events like the pandemic will have permanent effects;
  • Consumer behavior generally shows little desire for sustainable practices;
  • The capability of electric vehicles is being exaggerated and their shortcomings downplayed; and
  • Past transitions do not suggest a peak and a decline in oil demand is likely.

The case for a near-term peak in oil demand is certainly more plausible than that of peak oil supply, but its popularity reflects a degree of exuberance that is not warranted by the data.

Click here to access the paper on this topic written by primary author Michael Lynch, Distinguished Fellow with EPRINC and the author of The Peak Oil Scare and the Coming Oil Flood (Praeger 2016), and Ivan Sandrea, trustee of EPRINC and the former CEO and founder of Sierra Oil and Gas.

EPRINC Fellow Emily Medina has published another piece on Mexican public policy and energy economics. This paper, entitled “The U.S.-Mexico Energy Relationship Going Forward,” examines the future of the relationship between the two countries focusing on bilateral energy integration, Mexico’s new nationalist policies, and the incoming Biden administration while keeping the geopolitics of the world in mind. The paper can be found here.

The piece has been published by Mexico Today, an English-language news service by the newspaper Reforma.

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