Sic Transit Gloria: Beware of Energy Complacency
CNBC's Patti Domm posted a very good discussion about the apparent reversal of America's energy fortunes. Advanced drilling techniques have boosted domestic gas and oil production. The rosiest forecasts predict that the U.S. can wean itself off foreign supplies within a decade.
Plentiful, secure energy supplies are a good thing. However, complacency is not. My greatest concern is that industrial decision makers will scale back their energy management efforts in reaction to headlines like this. They will say, "if energy is more plentiful, why bother?" Just crank up everything and let it run. Laissesz les bon temps rouler.
Three facts should give us pause before accepting this conclusion.
First, there may be more supply available, but it's not easy to extract. The cost of advanced drilling techniques ensures that fossil fuels shall never be free. Second, the market for petroleum distillates is global. Global demand outstrips domestic supply, so the market price-- the price paid by everyone, including U.S. consumers-- will be bid up by foreign demand. As for natural gas consumers, the short term price outlook is very good. After all, the market for natural gas is technically constrained by transmission and distribution infrastructure. In other words, there are no pipelines connecting Louisiana with China. However, the advent of natural gas liquification (LNG) technology means that domestic natural gas supplies will be increasingly available to a global market. With more buyers available, prices will be bid up accordingly.
The third fact should resonate with industrial energy consumers. Let's say that industry should scale back its energy efficiency efforts, if only because supplies are more plentiful. If so, we should also march into corporate accounting offices and declare that cash management activities should be shelved. Why? Because with the cost of money today is at historic lows due to prevailing interest rates. All the checks and balances aren't worth as much, right? Think about what would happen to corporate liquidity if cash balances were managed the same way as the old-school energy approach. With energy, just shovel on the coals and let everything run full blast. Who wants to be bothered with energy management chores? Try the same approach with cash accounts and watch what happens.
If short term energy surpluses lead to lower prices, this creates an opportunity for American industry. Cost savings can be reinvested in efficient technologies and procedures to hedge against future price volatility. Other countries are already doing this. The last time I checked, U.S. industry is competing with these countries. Complacency does not pay, especially in the context of global competitiveness.