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Energy pricing and the Vermont model!

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Art Woolf, an associate professor of economics at the University of Vermont in the United States

Art Woolf, an associate professor of economics at the University of Vermont in the United States

A report put together by Art Woolf, an associate professor of economics at the University of Vermont in the United States, “Low Energy Prices and Fracking” is the focus of DrillBytes for the week.

Energy prices have fallen for two reasons. One is the rapid slowdown in economic growth in China, which has cut worldwide demand for energy and put downward pressure on all natural resources prices, including energy. But an even bigger cause is on the supply side of energy markets.

We have been living through a dramatic change, almost a revolution, in energy production over the past few years. That’s not because of increased use of solar or wind energy.

Combined, those renewable make up only five per cent of all the electricity produced in the United States, and less than two percent of all the energy used in the nation for transportation, electricity, heating and all other uses. This rapid decline in energy prices is in large part because of two technological changes in the oil and natural gas industry.

The former, better known as “fracking” or fracturing enables oil producers to extract literarily billions more barrels of oil out of the ground than was available just a decade ago. That oil was thought to be permanently locked up in rock formations.

The EIA estimates that about 78 billion barrels of this previously unavailable oil can now be pumped out of the ground and that’s just in the United States alone. There’s another 300 billion barrels available worldwide.

To put those numbers into perspective, Americans currently use about seven billion barrels of oil each year and total annual world consumption is about 35 billion barrels, so this new technology is like discovering oil wells that will satisfy world demand for a decade. So far, most of the new technologies have been used in the United States oil and gas fields and that’s important, given that the United States today, is the world’s largest oil producer responsible for 20 per cent more petroleum than Saudi Arabia, the world’s second-largest producer, 50 per cent more than Russia and three times as much as China or Canada, the fourth and fifth largest producers in the world.

Fracking and horizontal drilling technologies were not developed by Exxon, British Petroleum or the major oil companies but by small, independent and innovative oil entrepreneurs.

Those technologies have increased the United States oil production from five million barrels per day in 2008 to more than nine million barrels today. That four million barrels increase is more than the total production of Iran, Iraq, Mexico, Kuwait, Venezuela or Nigeria. It’s a similar story with natural gas. Regions of the United States that were never thought to have significant amounts of recoverable natural gas, places like North Dakota and Pennsylvania are now centers of natural gas production. That has significantly increased the United States production and in the process, it has made many farmers very wealthy.

The dramatic increase in oil and natural gas has significantly reduced energy prices. This has caused more people to switch to natural gas to heat their homes and more importantly, electric utilities to shut down coal-fired power plants. Six years ago, coal-fired generators produced more than twice as much electricity as power plants that used natural gas as their fuel source. Today, there is almost as much electricity generated from burning natural gas as from oil.

A vocal group of Vermonters is opposed to “fracked gas” in Vermont’s only natural gas pipeline and presumably, to “fracked oil” that we are putting into our cars. Whether we use it or not, fracked gas and fracked oil is a big reason Vermont families are saving up to $3,000 per year on their energy costs and paying $2.20 for a gallon of gas and not $4.00. If you support a higher standard of living for Vermonters, whether it comes from higher incomes or lower prices, it’s hard to oppose lower energy prices. Using more natural gas, including fracked gas, to generate electricity has fallen by 25 percent in the last six years. If you are concerned about carbon in the environment, it’s hard to oppose the increased use of natural gas as a fuel source.

Back home in Nigeria, it doesn’t matter whether a barrel of oil sells for $200 or $20, fuel price remains the same, fuel to live a life and fuel to power a life. If this is not normal, why must it continue to look so? Even though Nigeria’s major sources for power generation remains hydrothermal, coal and gas driven, it is not such a herculean task to break the aggregate pricing to the lowest units for consumers to plan with. Even though major gas lines have been ruptured by vandals, getting a price template as done by the Petroleum Products Pricing and Regulatory Agency (PPPRA) in the downstream sector should not be a rocket science! The concerned ministers, regulatory bodies and oversight agencies should please, help break down the economics of oil production, refining (locally and imported products) and logistics down to the cost per litre as well as the cost of energy down to a kilowatt hour. This is the message from Vermont and certainly, a model of what energy pricing in a competitive market should look like.

• Adeoye is an energy expert in Lagos.



1 Comment
  • Industrialised nations keep using gas, oil and coal to develop but are asking poorer nations not to in the guise of climate change. We are watching!