Bill White's View | Russell T. Rudy Energy LLC
Bill White, former Houston Mayor, Deputy Secretary of Energy, and Senior Advisor with investment banking firm Lazard, addressed a recent meeting of the Houston Chapter of the American Petroleum Institute. He commented on a range of topics and his remarks are summarized below.
Volatility-The energy industry is intrinsically cyclical. The severity of downturns and the magnitude of upswings can vary, but the industry will always respond to high prices with more supply which in turn drives prices down. In 2014 the industry was living on borrowed time. We were overdue for a downturn, but several factors had artificially prolonged the era of high prices. Libyan and Iranian production were significantly curtailed due to political unrest, and sanctions respectively. Traders who had gone long on crude had to keep buying to cover contracts, and the global market had become overly dependent on Asian demand. When shale operators kept increasing supply and the rates of economic growth in China and India proved unsustainable, prices collapsed.
Recovery-Market swings are the net effect of so many variables that it is impossible to predict where prices will go and when. White does not agree with analysts who predict a third quarter recovery this year. Libya is still not back to producing at its normal levels and sanctions against Iran could be removed if a nuclear agreement is reached. China is serious about reducing emissions from transportation fuels and is aggressively attempting to increase mileage standards for vehicles. This will dampen demand for gasoline. Finally, there is still a huge volume of oil in conventional storage and the fraclog waiting to flood the domestic market.
Natural Gas-Power generators are now convinced that natural gas is a reliable and economically viable substitute for coal. Environmental concerns, if nothing else, will drive conversion to natural gas. LNG export projects will help natural gas prices as well.
Regulation-The problem with regulation is that all the expertise in energy resides in the private sector. The bureaucrats do not have the expertise that industry personnel have, and those in the industry do not want to work for the government. As former Deputy Secretary of Energy, White aggressively recruited industry leaders to work in government, but with virtually no success.
Crude Oil Export Ban-While some refiners, regulators, and consumer advocates oppose lifting the ban, White feels that allowing domestic crude into the global market will drive down the price of Brent (the international benchmark) which will ultimately lower costs for U. S. refiners. These cost savings would result in cheaper gasoline for consumers.
Consolidation-Even with high prices, there will always be mergers and acquisitions within the energy industry, if for no other reason than very different costs of capital. ExxonMobil recently borrowed at a rate only slightly above the projected rate of inflation. European and Japanese companies are securing loans at virtually no premium over inflation. Other companies as finding they cannot raise debt capital at all.
