Regulation Versus Deregulation in the U.S. Energy Business

Pumping gas

The prices of energy products have been very volatile over recent years. In June of 2014, crude oil was trading at over $107 per barrel, and in February 2016, the energy commodity traded to the lowest price since 2003 when it hit $26.05. The decline of over 75% was dramatic and caused any economic and political issues around the globe.

In February 2014, natural gas rose to almost $6.50 per million Btu’s but March 2016 the price declined to the lowest level since 1998 when it traded at $1.61 per MMBtu.

The drop also exceeded 75%. The retreat in energy prices has been a significant event over recent years.

The demand for energy has increased alongside global population; more people in the world require more energy to power their lives. In 1959, the total population of planet earth was below 3 billion people. In 2016 there were approximately 7.348 billion inhabitants in our world. China is the most populous nation on earth with 18.7% of the world’s population within its borders. Therefore, it makes sense that China is the world’s largest consumer of energy. The United States is the third most populous nation in the world with less than 4.5% of the world’s people, but it is second when it comes to energy consumption. The second largest country by population is India with over 17.2% of global population. However, India is far behind the U.S., consuming less than half the energy of the U.S. Therefore, the United States is a significant consumer of energy and changes within the country over coming years is likely to have a profound effect on the price of all types of energy.

The United States has bountiful supplies of oil, natural gas, and coal within its territory. One of the reasons for the fall in oil prices over recent years was the increase in petroleum production from shale regions of the United States. Additionally, massive reserves of natural gas exist in the Marcellus and Utica shale regions of the U.S. When it comes to extracting oil and gas; hydraulic fracking is a relatively new technology that has allowed low-cost extraction of the two forms of energy from the crust of the earth within U.S. borders.

Global Warming

Scientists have reported an increase in the temperature of our planet over recent years. Many studies have pointed to an increase of greenhouse gas that traps heat radiating from Earth toward space. These gases are the result of emissions from fossil fuels in cars, factories and the production of electricity. The culprits when it comes to these gasses are crude oil and oil products and coal. While the demand for petroleum-based fuels has increased with population, technological advances are increasing the popularity of automobiles that are battery powered. Additionally, other sources of energy such as wind, solar, nuclear, and hydroelectric powers have been growing in popularity in the U.S. and around the globe to fight or slow down the effects of global warming.

When it comes to electricity, power generation has come from burning coal for many years. However, the effects of coal on the environment have led to an increase in power generation using natural gas instead of the pollution generating commodity. Replacing coal with natural gas has created other problems for the environment.

Fracking Has Side-Effects

The massive discoveries of natural gas reserves in the United States have led to a boom in production.

In the shale regions of the nation, producers inject a mixture of water and sand into the crust of the earth under high pressure to release the natural gas. They then store the gas in pipelines and storage facilities as energy stockpiles and reserves. However, environmentalists have pointed to many problematic side effects of natural gas production.

The process of fracking seems to have increased seismic activity. In states like Oklahoma and Texas, the number of earthquakes and tremors has increased dramatically over recent years. Blasting the solution of water and sand into the crust of the earth moves rock formations leading to events that shake the ground. Many people are concerned that technological advances in energy production amount to tempting Mother Nature to create events that will result in an increasing number of natural disasters.

Furthermore, others believe that fracking has detrimental effects on water tables and supplies. With potable water becoming scarcer as more people on earth require an ever-increasing amount of water, any problems with the water supply are problematic when it comes to fracking for energy commodities.

More Versus Fewer Energy Regulations

One of the issues of the 2016 Presidential election was regulation of the energy industry. The Republican candidate, Donald Trump, advocated for fewer regulations. He argued that the political benefits of energy independence for the United States outweighed the environmental dangers of fracking and fossil fuel emissions. A policy of less regulation would likely lead to lower energy prices.

Meanwhile, the Democratic candidate for President, Hillary Clinton, argued that environmental concerns require more regulations and an increase in the availability of alternative fuels for the future. Increasing regulations make the cost of production rise as companies must invest in following the rules imposed by government agencies such as the Environmental Protection Agency. Additionally, more regulations could decrease the amount of energy output in oil and natural gas as the cost of production could rise to a level that exceeds market prices for the commodities. Finally, when it comes to coal, increasing regulations over recent years because of greenhouse gas emissions has caused coal production in the United States to decline dramatically as many coal mines in areas West Virginia closed. Following the regulation made the coal-mining business a losing proposition for many producers. In 2015, the two largest coal producers in the United States, Arch Coal, and Peabody Energy filed for bankruptcy. Since the United States is one of the world’s largest consumers of energy, the policies of the nation affect the price of all energy output around the world. More regulation is likely to cause U.S. production decline, and prices rise while less regulation will create more abundant output levels and lower prices.

Meanwhile, the election of Donald J. Trump as the forty-fifth President of the U.S. likely means less regulation in the energy industry for the coming four years and lower prices.

Energy and the World

In the United States and Western Europe, concerns about the environment have been more prevalent than in other countries around the world. In Russia, China, India, and many other nations, environmental issues often come second to concerns about production and revenue generation from energy commodities or demand and available supplies to power society. Therefore, different parts of the world find themselves at odds when it comes to regulations. In many ways, an increase in the regulatory climate in the U.S. and Western Europe can decrease supplies and cause prices to rise benefiting those countries that continue to produce oil, gas, and coal. Russia and oil-producing nations in the Middle East would see an increase in revenue from commodity sales for the short-term. However, technological advances could eventually cause a decline in global demand for traditional fuels as the world turns to alternative, cleaner energy sources in the years and decades ahead.

China and India suffer from some of the worst pollution on earth. However, these nations are still building infrastructure which will require more energy in the years ahead. Both countries have expressed a desire to decrease pollutants into the atmosphere, but both continue to be major consumers of oil-based fuels and coal.

The Investment Landscape for Energy

In the United States and Western Europe, some of the biggest companies in the world are involved in the exploration for, production of, and servicing of energy commodities. When investing in these companies, it is important to understand the regulatory climate and the dynamic landscape of regulation enacted by the United States or the European Union over the years to come.

Regulation will have a direct impact on the prices of energy commodities. The more regulation, the higher prices for oil, gas, and coal are likely to go as supplies decline due to increasing production costs. On the other hand, if regulations were to decrease, as they may in the U.S. over the course of the Trump Administration, it is likely that prices will move lower as output costs would fall. When it comes to trading the commodities directly, oil and natural gas are both traded on U.S. and foreign futures exchanges. On the New York Mercantile Exchange (NYMEX) a division of the Chicago Mercantile Exchange (CME), oil and natural gas futures attract huge trading volumes on a daily basis. Energy futures also trade on the Intercontinental Exchange (ICE). Trading in these markets or investing in companies that produce energy commodities requires knowledge about the fluid state of the regulatory environment. Political factors often determine the trend of regulation in the United States and around the world, and that can be a moving target.