Wednesday, November 16, 2016

Gas in the Time of Trump

It's been interesting to watch the world react to the prospects of a Trump presidency over the past week.  Like him or hate him, the one constant is that nobody knows what the hell he will do.  We've elected the ultimate wild card.  Much has been said over the past week about his impact on natural gas, and all I can say is "who knows?"  I personally believe the Pragmatic Trump will emerge, but I feel that I would have the same luck with my predictions at the horse track.

First, it must be noted that natural gas over the past decade is the quintessential American story.  Ingenuity and persistence led to new technology, which opened up vast reserves of gas.  Entrepreneurs rushed in to exploit the myriad of opportunities.  All that work led to a structural oversupply of gas, which tilted the market and suppressed prices.  Low prices "culled the herd" of entrepreneurs but simultaneously impacted other markets, specifically coal-fired power and LNG.  Cheap gas tipped the scales in the power market from coal towards gas (let's be perfectly clear:  George Mitchell did more to "kill coal" than Obama ever could have) and vast amounts of capital have been invested in terminals to export natural gas.  And then it really got messy.  But the bottom line is that we in the U.S. have an enormous natural gas resource that should be a force for economic good in this country.

But based on Trump's campaign statements, he wants to reboot the coal industry and stifle trade with Mexico by scrapping NAFTA, both of which are serious threats to natural gas.

Let's look at the coal issue first.  The poster child of the decline of the coal industry is Appalachian coal.  To be honest, however, the eastern coal industry had already begun a long, steady decline well before any "war on coal" started.  Most of the easy coal veins have been tapped and there are only so many more mountaintops in West Virginia that can be blown off.  Accessing underground coal is expensive and dangerous.  Either way, East Coast coal is not getting any cheaper.  But gas prices seem to know no bottom, especially in the Marcellus/Utica region.

Without any restrictions on coal-based pollution or limitations on environmentally hazardous mining, gas would still be "trumping" coal as the power source of choice for utilities.  It is cheaper - that should be enough for the power companies right there.  But gas burns cheaper than coal and is an easier fuel to work with (faster generator start/stop, no ash ponds, less air pollution, etc.), and most of the existing coal plants are old and inefficient.  The switch from coal to gas is a market decision.  If you ran a utility and need to make a multi-billion dollar investment in a new plant, what fuel would you choose?  Easy:  natural gas.  The added regulation of air pollution from coal plants only hastens the long-term decline.  Even if all of the environmental restrictions are lifted in January 2017, everyone knows coal is more polluting than gas (more carbon dioxide and other airborne pollutants), so why make a 40 year investment in it?  Regulations make little difference in the short-term.  The market is kicking coal's ass.

I think a Trump administration will scrap nearly every coal-related environmental restriction, but in the end, I don't think that will matter much.  Gas will still be cheap.  You can't mandate a plant to use coal instead of gas.  The market wins at the end of the day.  In any case, the power companies are agnostic in terms of fuel.  They are not going to invest in more coal with its greater long-term costs.  Coal is on the wrong side of history, as they say.  Coal was a bridge out of the industrial revolution.  Gas is a bridge to the future, but it is actually not the future.  The future will be non-carbon based fuels.  The only problem is the future is still way out there, so gas is our best alternative now, but that's a conversation for another day.

The world has changed based on market forces, and you can't turn that tide.  Trying to stop market-based change is like trying to hold water in your hands.  It works for a short time but the water will eventually find its way through your fingers.  If Trump wants to help coal country, he should be working on efforts to diversify the regional economy and improve infrastructure, while retraining workers in non-coal jobs.  The best he can do is stabilize coal employment.  He also needs to take on the social costs of change, like opiate addiction.  Globalization is not going away, no matter how many populist leaders get elected around the world.  We have to deal with its impacts.

I think Trump will also push for "clean coal."  Good luck with that.  G.W. Bush pushed it.  It failed.  Obama pushed it.  It failed.  Trump will push it.  It will fail.  I'll actually put my money on that.  This is not a market solution.  It is a pipe dream that would have to be heavily subsidized to "work."  But it will never be successful.

Next is exports.  I'd be a little nervous if I had invested millions and billions in LNG export infrastructure and pipelines to Mexico.  I think LNG exporters will be OK because Trump will put some fat cat oil man in charge of Energy.  Oil and gas export will be a major plank in the energy policy for Trump.  But what about the growing gas export to Mexico?  Over the past five years, gas exports to Mexico have increased from less than 1 Bcf/day to more than 3.5 Bcf/day and are expected to go above 5.5 Bcf/day in the coming years.  What happens if Trump "tears up NAFTA" (if he actually could do that)?  If I'm Mexico and I'm getting caught in a trade war with the U.S., I'd tell the U.S. to pump that gas where the sun don't shine.  Cutting +/-6% of daily demand would crush gas prices.

But would that really happen?  I think the Pragmatic Trump would realize that negative impact.  Most of NAFTA's impact is irreversible and much of its benefit is misunderstood.  It was a good campaign soundbite for him, but in practice, I don't think he is going to do anything toooooo stupid.  If he does and it costs us gas exports to Mexico, the resulting low gas price is just going to make it harder to try to revive Appalachian coal country.

Ultimately, I think energy policy under Trump is going to look not much different than it did under G.W. Bush.  But it will probably be a much wilder ride.


Anonymous said...

Very good analysis, Robert. Glad to see you back in the saddle.

Regarding "clean coal," that's like making a silk purse out of a sow's ear.

Even though Trump made a big deal about Obama and Hillary wanting to shut down the coal mines, as you point out, it was natural economic forces--cheap gas vs. expensive coal--that drove industry away from coal. Trump, the "business man," certainly must have known that when he promised to open the mines and bring back coal production.

Keep it up!

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