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Marina and I will soon board a plane for another trip to Europe.
We are off to Frankfurt, where I have meetings on European natural gas import costs; meanwhile, my better half gets to spoil our grandchildren, who live just outside the city.
My responsibility is to address the energy balance problems emerging for the continent. The focus may be on Germany and the rest of Western Europe, but these problems are emerging elsewhere around the world.
With Berlin opting to phase out nuclear power, the continent’s largest economy now has a daunting task to assemble an energy mix that meets expected demand.
This started as a political tradeoff, but it is likely to become the major concern in the broader national strategy to stave off recession. A similar tradeoff is developing in the United States.
A much-ballyhooed German venture into solar and wind has hit a brick wall. There is now a played-down move to import additional nuclear-generated power from neighbors, but now the country is doing the unthinkable to meet its energy demands.
This environmentally conscious country, with one of the strongest green political movements in Europe, is now importing more coal than at any point in the past decade.
The options are limited, along with the time to decide on how to implement all of it. That is likely to result in a political tradeoff distasteful to just about every political party and interest group in Germany.
However, the problems do not end there.
The United States could too be facing a similar situation in the not too distant future.
As an energy investor, you must stay a step ahead of this coming problem.
Germany’s Tradeoff is Underway
Despite heavy support for renewable energy sources, Germany will likely increase its reliance on natural gas imports in the near term. But that will produce two unsavory results. First, it brings the continuing influence of Russian sourcing (and geopolitics) back into the debate.
Second, it threatens to derail the energy balance of an entire continent.
Now the first of these is not a matter likely to be a concern in the United States.
Here, there are ample reserves of unconventional gas (shale, tight, coal bed methane). Far from looking at more imports, the American market is poised to become a major exporter of fuels.
The advent of liquefied natural gas (LNG) over the next several years will transform the structure of the domestic gas market and the direction that gas surplus is heading.
The second problem facing Germany, however, has greater relevance to the United States.
Decisions in Berlin have created major impediments to the energy balance beyond German borders. This balance holds the key to Europe’s future.
Ideally, this balance should provide multiple sources of energy, allowing for exchanges among sources to maximize efficiency and availability. Of course, until main-end uses – primarily among them transportation – have genuine alternatives, the full advantage of a balance will not be realized.
Still, the groundwork needs to be established without further delay. The view that one energy source should be regarded as a replacement to another misses the point. This is not the search for a silver bullet; the objective is to provide as seamless a provision of energy needs as possible.
What Self-Sufficiency Means to the Energy Balance
Here is where the current German situation has relevance to that is unfolding on the other side of the Atlantic. In the U.S., a shale gas revolution augmented by an emerging abundance in tight oil has prompted talk of self-sufficiency.
As I have noted before, that may happen. By 2030, if not earlier, only about 30% of crude oil needs will be met by imports, virtually all of that from Canada. Meanwhile on the gas front, there is at least a century of shale gas available.
While this is good from the standpoint of national security (not being dependent upon other parts of the world for our energy needs), it is not automatically as beneficial when it comes to the other major concern.
The price of energy.
As it turns out, the play between these two issues had until recently obliged a difficult choice. Security considerations would dictate less use of imports. However, given the cheaper cost of extraction abroad and the rising expenses of maturing U.S. conventional production, price considerations resulted in more imports.
The unconventional discoveries changed that outlook. With significant reserves emerging at home, the import picture changed radically. American oil production was higher in 2012 than at any time in the last decade. Volume will be even higher this year.
The assumption on the pricing side was also upbeat. It was said the domestic largess would guarantee low prices.
However, while the initial projections were optimistic, three new problems have emerged.
Three Problems Arise in the Energy Balance
First, more of the unconventional production on both the oil and gas side was coming in more costly than anticipated, especially as deeper strata were included. There, at an average of 12,500 feet (the Eagle Ford or Utica, for example), costs could easily run three times or more than that of a shallower well.
Second, entirely new or expanded infrastructure and service networks were needed. Those expenses will be floated downstream to the end user and show up in increased prices to the consumer.
And, recently, the third pricing consideration emerged.
By emphasizing new volumes of plentiful energy, the domestic market does not always produce the cheapest usage. Drilling costs, for example, are rising because of inflation.
There is the inefficient assumption that one energy source fits all. But, you and I both know that it does not.
The U.S. market has found new sources of domestic energy. Germany, however, is becoming more dependent upon imports. But both are confronting an energy mix that will lead to balance concerns.
That always produces inefficiency, regional pricing irregularities, and a coerced choice among energies where market problems are accentuated by subsidies, forced minimum usage by source, and far too much television advertizing supporting one policy over another.
The German situation, therefore, should give us pause.
The U.S. is not emphasizing an energy balance either.
And, in the end, consumers in both nations will pay the price.
We’ll discuss how to play this trend in the coming weeks.
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