Renewable Portfolio Standard - Disaster for the Economy

Executive Summary

The words “Renewable Portfolio Standard” (RPS) should strike fear into the hearts of all Americans.  Unfortunately, most Americans don’t understand the concept of RPS, much less its dire consequences.  To date, 29 states have passed RPS legislation which requires utilities to, over time, increase the amount of renewable energy delivered to its customers.  On the surface this sounds like a laudable goal.  Unfortunately, there are two major problems with RPS legislation.

·         Utilities are forced to purchase uncompetitive electricity generated from renewable sources (These much higher costs, sometimes 2 to 3 times higher than electricity generated from fossil fuel, are passed along to the consumer or electricity).

·         Taxpayers foot the bill for direct subsidies, grants, loan guarantees etc. while rate payers are saddled with higher energy costs for the life of the renewable energy power contract (usually 20-25 years).

Oil And Gas 102

I have used PowerPoint as a way to present the basics of Oil and Gas price fluctuations and their short and long term drivers.  The presentation includes

• Global Supply/Demand and Surplus Capacity
• Economic Growth as a driver
• Domestic Supply/Demand
• Energy Policy
• Oil Market Speculation

And much more!

(Start the presentation by clicking on the arrow in the middle of the screen.  Typically each slide has many "layers".  Use the space bar to proceed through each layer of the slide.  When the last layer of a slide is reached using the space bar will result in moving to the next slide)

Oil and Gas 102

More PowerPoint presentations from BTUGuy

Disclaimer: Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice

Speculation in Oil Markets

Editor's note: The following is an excerpt from a research paper I recently completed.

Background

Oil futures markets are a relatively recent phenomenon.  The first “oil” futures contract developed was for heating oil traded on the New York Mercantile Exchange (NYMEX) beginning in 1978. The success of the contract led to the implementation of the West Texas Intermediate (WTI) crude oil futures contract in 1983 as well as a gasoline contract in late 1984.  By 1990 there were 10 active oil futures trading contracts worldwide. Prior to 1978, the “bible” for price discovery was a daily publication called “Platt’s Oilgram”.  Prices for physical oil were reported to Platt’s by the oil traders themselves.  Platt’s makes a good faith effort to verify prices by contacting parties on both sides of the transaction.  Obviously, verification takes time so Platt’s price information, although relatively quick and accurate, is not instantaneous.   

The oil futures market provides instantaneous price discovery.  Futures markets also allow industry participants to shed risk by selling product for future delivery at a guaranteed price.  This practice is known as hedging.  The futures markets allow non-commercial players (speculators) to participate in oil markets.  Speculators serve two purposes.  First they provide liquidity to the market allowing trades to be made more readily.  Second, they represent the “other side” of the transaction.  For example a crude producer may want to sell his oil into the futures market to “guarantee” a price in the future.  Obviously, for each contract there must be a seller as well as a buyer.  The futures market provides a clearing house for buyers and sellers.  A speculator may be that buyer.

Dueling Models

Has “speculation” driven prices to levels higher than the “true value of oil”?  The three part answer is as follows.

o       The Commodity Futures Trading Commission (CFTC) says no.

o       The James A. Baker III Institute for Public Policy at Rice University (JBIPP) says maybe

o       The St. Louis Fed says yes

Each of the aforementioned institutions agrees on one point – The supply/demand balance is the single largest factor in pricing of oil.

Energy Facts and Fallacies

Energy is a complex business that doesn't lend itself to sound bites.  Nearly every day, one is exposed to statements that are misleading or just plain false.  I call this B.U.L.L. (bombastic utterances of laughable lads).  Below are some of the sound bites proffered by politicians and "talking heads" followed by a detailed explanation illuminating the truth as I see it.  The statistics and figures presented come from reliable sources.  Subject matter covered is as follows:

• "Oil Exports"
• Domestic Oil Production, Imports and Reserves
• Oil Production from Federal Lands
• Energy Independence
• Quick fix for gasoline prices
• Oil Company Subsidies
• Oil Company control of retail markets
• Oil Market Speculation
• "Dirty" Canadian oil
• Keystone XL pipeline

Obama's Energy Policy - The War on Carbon

The Administration pays lip service to developing our own oil and natural gas resources.  As always, actions speak louder than words.  The Administration has: 

• Placed a de facto ban on leasing of offshore federal lands off the west coast, east coast and Alaska
• Substantially slowed the permitting of shallow and deep water drilling in the Gulf of Mexico
• Killed construction of the Keystone XL pipeline
• Subsidized failed green energy projects
• Through EPA action in early 2009, began the process that will ultimately lead to massive regulations for almost anything that emits carbon dioxide.

Delta to Buy Refinery - Such a Deal?

Conclusion

It is my opinion that Delta’s acquisition of the Phillips 66 Trainer refinery is a risky bet.

• Domestic gasoline demand has declined leaving the industry with surplus capacity
• The locus of demand is shifting to developing Asia.
• The policy of many OPEC producers has been to refine more of their own crude oil
• Domestic margins for gasoline are being squeezed in part due to the US exporting rather than importing the product (Exports increase transportation cost and therefore decrease refinery net back).  The short term exception is for those who have access to WTI and Bakken crude oil (more on this later)
• Slow economic growth will continue to hamper refinery profitability
• Simpler sweet crude refineries (like Trainer) are competing with more sophisticated Gulf Coast plants and from imports from Europe

Cape Wind Blows (for Taxpayers and Ratepayers)

Cape Wind is a massive $6 billion, 468 Megawatt wind farm to be built off the Coast of Massachusetts.  The project includes 130 wind turbines covering an area of 25 square miles.  Great huh?  Not so fast.  In my opinion, this project could never be built without massive subsidies.  In the case of Cape Wind, the taxpayer and ratepayer will carry the burden.  Here are some fun facts.

Buffett's Green Sure Thing - Topaz

In December of 2011, MidAmerica Energy Holdings, a subsidiary of Berkshire Hathaway purchased a large solar PV project called Topaz from First Solar.  The project is a 550 megawatt solar farm being built in California with an estimated completion date of 2015.  First Solar work included an approved EIS and a 25 year PPA (purchase power agreement) with PG&E. The price of the transaction was not disclosed.  In my opinion, the price was likely quite low.  First Solar was unable to finance the project itself, however, First Solar will benefit handsomely from the sale because of its Engineering and Construction Contract and its Operating and Maintenance Contract with MidAmerica.  In addition, it is likely that the solar panels used in the project will be First Solar products.  MidAmerica is financing 50% of the project through bonds.  I have researched the project and it appears that Buffett made a very good deal (Bruce Krasting wrote a very interesting blog about this project in December of 2011.  See the link http://brucekrasting.blogspot.com/2011/12/another-sweet-deal-for-buffett-who-pays.html ).