Boone Pickens Predicts $400 Oil

June 14, 2010

Summary

Boone Pickens predicts that the US energy policy will drive the price of oil to $400 per barrel in less than 10 years. But, the US energy policy has historically had little influence on the world price of oil. Pickens advocates natural gas as an alternative to OPEC oil. This would benefit Clean Energy Fuels Corp., a company of which he owns almost 30%. Nevertheless, natural gas is a cost effective alternative for long haul transportation. Moreover, the US energy policy needs an overhaul.

Analysis

On June 4, 2010, Boone Pickens appeared on the CNBC program, Mad Money w/ Jim Cramer, and declared that the current US energy policy will drive the price of oil to $400 per barrel in less than ten years. I disagree with Pickens’ statement because the US energy policy has not influenced the world price of oil since the first oil embargo in 1973. However, the US energy policy does impact our energy independence, which is associated with national security.

 

Pickens is promoting that the US energy policy should be revised to revolve around the increased consumption of natural gas, or ‘anything other than OPEC oil’. He has a vested interest to increase natural gas usage, not only for BP Capital, his investment fund, but also for Clean Energy Fuels Corp., a company of which he owns nearly 30%.

 

Liquefied natural gas (LNG) is the most viable clean energy alternative for long haul transportation and large concentrated diesel users, such as ports or railways, because it has high energy density, and is lower cost per BTU than crude oil. Increasing LNG consumption for long haul transportation would require a capital investment to convert existing truck fleets from diesel to LNG. Truck and engine manufacturers, such as Paccar Inc., Navistar International Corporation, and Cummins Inc., could be some of the beneficiaries from this conversion.

 

Pickens supports passage of the Natural Gas Act of 2010 in Congress. This Act provides tax incentives for natural gas vehicles and fueling stations. While this could be a good start, the current US energy policy favors ethanol as the chosen alternative fuel. So, there are at least three conflicting energy policies that the Obama administration would also need to reconcile. 

 

First, the Renewable Fuel Standard (RFS) is ethanol centric. The Greenhouse Gas (GHG) reduction required by the RFS will increase sugar cane ethanol imports from Brazil until cellulosic ethanol products become economical and available. Instead, the RFS should only require a GHG reduction, and should be technology and product neutral. 

 

Second, increasing the percentage of ethanol required in transportation fuels will decrease Corporate Average Fuel Economy (CAFE) because ethanol has a lower energy density than fossil fuels. So, to comply with CAFE, automobile manufacturers will have to sell more high-MPG vehicles, such as hybrids or diesels, which are less profitable than gasoline powered vehicles because they cost more to produce, and have historically required consumer incentives to sell.

 

 

Finally, the US government needs to fund infrastructure spending across the entire alternative fuels supply chain, including pipelines, railways, distribution terminals, and retail outlets. Currently, the only infrastructure improvements being funded by the US government are new E85 stations, which could stretch the already taxed ethanol distribution network to the breaking point. As Pickens points out, many of the major oil companies are investing in US natural gas production, which should increase the supply of natural gas in the US. According to Pickens, this supply increase will lead to increased availability at the retail level. However, the major oil companies no longer control the fuels distribution system, or own many of their branded service stations.  Most of these systems are in the control of Master Limited Partnership (MLP) companies, which are more concerned with paying out a dividend than reinvesting. Matters of fact, most of these companies require firm take or pay contracts before they will invest!

 

Increasing the supply of LNG in the US fuels market could be a game changer that increases energy independence, decreases transportation costs, and reduces many criteria pollutants, including nitrogen oxides, particulates, and greenhouse gases. Like Pickens, I advocate that Congress start by passing the Natural Gas Act of 2010, and then continue by reconciling the conflicting energy regulations that are a legacy from the 1980’s, when the US was actually projecting to run out of natural gas.