The Dramatic Transformation of the Oil and Natural Gas Markets and Its Significance for the Climate DebateAlan Carlin | January 8, 2016
As explained in some detail in my book, Environmentalism Gone Mad, from an economic viewpoint there is no fixed limit on the quantity of natural resources on Earth which will sooner or later inevitably result in scarcity and higher prices as human use continues. Rather, there is a range of resources of varying quality and extraction cost that can be exploited at a particular time based on the cost of doing so and the demand for the resource. One of the major influences on this resource availability and cost is technological change.
The oil and natural gas markets have recently undergone a very dramatic shift as a result of the increased use of fracking, horizontal drilling, and associated technological changes. This shift has resulted in increased output and lowered world oil prices by about 70% in the last year or two. Natural gas prices have similarly dropped precipitously in the US in the last few years but less so elsewhere because gas is much more difficult to transport internationally.
All this happened as a result of natural market forces since oil prices increased greatly in recent years prior to the current fall and this allowed the companies using the new technology to perfect their new technology and gain a foothold in the market. Their efforts have now resulted in the fall of world oil prices and US natural gas prices.
The Technological Revolution in Oil and Gas Production Has Greatly Lowered Prices
These price changes now appear to be affecting the global economy, and may result in a global recession as oil and gas producers reduce their exploration and development efforts for oil and gas and countries dependent on oil and gas revenue from large reservoirs are forced to retrench and rethink their lifestyles. The money spent by consumers for oil has greatly decreased worldwide and for natural gas in the US. Consumers will in time devote these savings to buying other products, but it will take them some time to adjust their lifestyles and buying habits.
These changes make the very costly policy changes pushed by the environmental left to force substitution of wind and solar power for fossil fuels even more ridiculous than they already were and doom their movement sooner or later. It now appears likely that oil prices will remain low throughout the world for many years and perhaps even centuries because the shale formations from which oil is now being obtained using the new technology are very abundant on Earth. The same is true of US natural gas, but substantially lower world gas prices must await the international transportation infrastructure for transporting gas from low price areas to high price areas and for other countries to overcome environmental objections and start drilling for shale gas too using the new technologies.
The Result Is That Wind and Solar Will Now Clearly Not Be Competitive in Our Lifetimes
It is now even more clear that wind and solar will not be able to compete in the marketplace for many years if not centuries, contrary to repeated assertions by the environmental left. Democratic governments do not have the influence needed to force consumers to pay for much higher priced wind and solar energy against this competition any more than they could prohibit alcohol production and use by humans. There will be repeated legislative and legal conflicts, but the eventual outcome is now clear. The environmental left will not give up easily, of course, despite the absurdity of their position.
The sooner the environmental left gives up on wind and solar, the better off everyone else will be. They and the governments supporting the “peak oil” argument for increasing investments in wind and solar will have to eventually admit defeat. This includes a number of countries in Western Europe and the Obama Administration working through the new EPA regulations on CO2 emissions.
Countries such as many in Western Europe that increase energy costs by trying to force wind and solar development will ultimately lose energy intensive industries to other parts of the world that do not do so. CO2 emissions may go down in the wind and solar-promoting countries but will rise even more elsewhere where CO2 emissions are much less regulated or even unregulated. The largely voluntary proposed Paris treaty has done nothing to solve this problem.
The Great Irony
The great irony is that the US has been reducing CO2 emissions more than other countries with earlier government-mandated CO2 reductions through the ordinary working of market forces, which increasingly favor natural gas for electricity generation in the US because of its low price. In other words, government policy to reduce human-caused CO2 emissions in Western Europe has been largely ineffective while reliance on markets has actually accomplished the mistaken attempts to reduce human CO2 emissions in the US prior to 2015.