Navigant Research Blog

Oil Prices Cut Drilling Sector Sharply

— September 17, 2015

Magnifiers_webOil drilling rig numbers in the United States have been declining rapidly, down about 57% from a year ago. The total count was 675 as of last week, up one from the week before. This marks the sixth week that rigs have been added by domestic oil drillers, although the numbers are still far lower than they were at this time last year, when the total number of oil rigs sat at 1,575. The rig count is approaching historic lows: the highest historical rig count was 4,530 in 1981; the lowest was 488 in 1999.

The total quantity of oil produced has not decreased nearly as rapidly as the number of rigs. Due to technology advances and greater efficiency, each rig has been yielding more oil production on average. Additionally, fewer rigs are being shut down in the most productive regions—the Bakken, Eagle Ford, and Permian plays. The U.S. Energy Information Administration estimated a decline of 100,000 barrels per day from June to July. This brought production in June to 9.3 million barrels a day. Overproduction in a tepid marketplace leads to further declines in the price of crude oil.

A Double-Edged Sword

The decline in drill rigs is related to declines in the price of crude oil, which has fallen from $98.15 in August 2014 to $45.63 a year later. Despite the obvious decline in drilling sector jobs, there are benefits to the declining numbers of rigs. Drilling rigs tend to use a lot of fuel, and quite often diesel. Recent regulations proposed by the U.S. Environmental Protection Agency limit the emissions produced by a diesel rig, but the real impact on emissions comes from the declining numbers of engines using the fuel. The decline in diesel use has enormous benefits for other sectors of the economy, including a surplus of diesel fuel to be used for agricultural purposes. Consumers in the United States are experiencing lower retail costs for gasoline and heating oil; worldwide, importing countries are also experiencing economic growth due to the lower cost of oil. Yet, the stronger U.S. dollar prevents this growth from being as dramatic as that in the States. Lowered oil prices are positively affecting many oil-importing countries, while negatively affecting the exporters.

Globally, it appears that the fall in oil prices should have a positive impact. Drastic declines in the price of oil tend to shift extra income to consumers, driving global economic boosts. According to The Moscow Times, whenever the price of oil is halved (as evidenced in recent years 1982–1983, 1985–1986, 1992–1993, 1997–1998, and 2001–2002), it is followed by rapid global growth. The inverse is also accurate, with rising oil prices preceding every global recession in the past 50 years. If trends hold true, the current decline in oil prices could lead to greater economic well-being around the world.

Last week, oil prices began to increase gradually, but a 3-day uptick was followed by a $2.10 fall to $47.10 a barrel. This still marks an increase from the $39.57 price of August 26. Perhaps the decline in oil drilling rig counts will not persist so very long, after all.


Uber vs. Everyone

— September 17, 2015

Corporate_Restructuring_webRide hailing service Uber has continued on its tremendous growth trajectory in 2015, with the service now available in around 300 cities throughout 60 countries. That geographic spread easily eclipses any competitors in the space, which are more likely to be localized services, although it is likely that Uber’s success helps many competitors by increasing demand for ride hailing services overall.

But its enormous success has also made Uber an enormous target. Stories of Uber’s battles with city officials, taxi and livery companies, and regulators pop up daily in the news. It’s not surprising, given that ride hailing is so disruptive to the existing order of livery services and the long-established relationship these services have had with regulators. The biggest battle for ride hailing is over whether these companies must comply with regulations governing taxi services in each of the cities where they operate. Stories of regulators clashing with Uber are well-known, especially in cases where the company was banned outright. However, the impact that ride hailing has on traffic congestion and on the use of other mobility modes is a critical area of concern for cities. For example, New York City Mayor Bill de Blasio recently accused Uber of exacerbating congestion in Manhattan, based on an analysis showing that traffic speeds had decreased between 2010 and 2014.

Increasing Costs

Right now, it seems unlikely that the ride hailing genie can be put back in the bottle. Too many people have come to rely on the service, and it’s not just the expected demographic of those 30 or younger. What seems more likely is not that Uber or other ride hailing services will disappear, but that it will face ever increasing costs doing business. This is especially true for Uber. Having so many geographic markets means grappling with different regulations in each one, as well as dealing with different business cultures. In Germany, for example, the company launched a new service with drivers who have commercial driver’s licenses after Germany banned Uber for using private, non-licensed drivers. In Philadelphia, the city’s parking authority imposed a $300,000 fine on Uber for operating illegally in the city, although the state’s public utility commission had earlier indicated the company was operating legally. These kinds of costs will only increase in cities where Uber already operates and as the company continues to expand.

More Data, Please

Another likely outcome will be a demand for more analysis of ride hailing’s impacts on vehicle miles traveled, on congestion, and on the use of alternative modes of transportation. For example, an analysis of New York City traffic speed data came to the conclusion that ride hailing apps were not correlated with lower traffic speeds. Ride hailing companies will be increasingly pressed to supply data to help generate high-quality, objective analysis. This analysis is crucial to understand how ride hailing apps fit in to the new urban mobility landscape, and whether they support policymakers’ goals to reduce congestion.


President Renews Commitment to Clean Energy, but Sustained Effort by Stakeholders Needed as Well

— September 17, 2015

U.S. President Barack Obama has renewed his commitment to promoting clean energy and energy efficiency with a set of executive orders designed to drive wider adoption of greener technologies. The president outlined his goals in a speech on August 24, in which he called for a greater penetration of renewable energy sources—wind and solar in particular.

The president’s executive orders encompass funding and a mix of private sector obligations, including:

  • Providing $1 billion in additional federal loan guarantees available for distributed energy projects using innovative technologies.
  • Releasing residential Property Assessed Clean Energy (PACE) financing for single-family homes to invest in clean energy technologies.
  • Creating a Department of Defense Privatized Housing Solar Challenge, as well as noting that companies are committing to providing solar power to housing on more than 40 military bases across the United States.
  • Announcing $24 million for 11 projects in seven states to develop advanced solar technologies that double the amount of energy each solar panel can produce.
  • Approving a transmission line that will support a 485 MW photovoltaic facility to be constructed in Riverside County, California and produce enough renewable energy to power more than 145,000 homes.
  • Creating a new interagency task force to promote clean energy, and announcing commitments from local governments, utilities, and businesses to drive energy efficiency in more than 300,000 low-income households, as well as investing more than $220 million in energy saving activities for veterans and low-income customers to help lower energy bills.

Energy Cloud and New Utility Thinking

These moves by the president and his administration are part of a larger trend already taking place, which Navigant Research has dubbed the energy cloud. In this emerging scenario, a broad range of technical, commercial, environmental, and regulatory changes are expected to combine to alter the traditional hub-and-spoke grid architecture. These changes are also resonating among some utilities. A recent survey of utility executives found that some 30% of respondents are planning investments in behind-the-meter technology (such as microgrids, energy storage, and distributed generation), and more than 40% of respondents are considering these types of investments.

The effort to promote clean energy has momentum and the government at the federal level can play a role, but utilities, their customers, and technology vendors are also needed to sort out what works and what doesn’t as part of a sustained effort. The approach taken by New York’s Reforming the Energy Vision (NY REV) seems to strike the right balance of government regulators setting some new guidelines and letting market participants come up with solutions and business models that can drive the cleaner energy market forward.


August Presents Prospects and Threats for Renewable Energy

— September 15, 2015

Rough_Seas_webOil prices experienced a tumultuous year in 2015. With an increase in North American shale oil supply and a lack of management of Organization of the Petroleum Exporting Countries (OPEC) production, an imbalance in the supply and demand of oil has led to wild spikes in oil prices. As oil prices have plummeted over 50% in the past year, renewable energy companies are understandably concerned.

Simple economics explains that when commodities prices are low, consumers will want to purchase and use more of the product. This is no different when it comes to energy prices. Dropping oil prices makes renewable energy sources appear comparatively more expensive, and thus consumers will return to oil.

However, simple economic models are too basic to describe why dropping oil prices aren’t always a harbinger of challenges for the renewable energy market. Volatility is one reason why oil prices won’t collapse renewable energy stocks. Investors understand that markets are erratic. Despite the current downswing, investors in oil should expect an eventual recovery. Lack of control in oil production leads to little price stability. By comparison, investors may view renewable energy technologies as a far more consistent opportunity. Additionally, the decline in the use of oil for electricity generation has limited the impact of oil prices on solar and wind generation sources.

Global Stock Market Crash

This August, China’s stock market suffered a significant fall. An initial 8.5% drop in the world’s second-largest economy had a significant impact globally. This market crash led to immediate further dips in oil prices, causing stock prices for renewable energies to continue to decline as well. One cause of the Chinese market crash was a decision by the Chinese government to devalue its currency in an attempt to reduce costs of exports. China is currently the largest manufacturer of solar panels, often exporting solar panels globally below the production costs of competing manufacturers. As a result of the country’s currency devaluation, there are concerns from competitors that Chinese solar panels will continue to decrease in cost.

A New Clean Power Policy

President Barack Obama rolled out a new clean power policy this month that will provide federal backing for clean energy technologies. The plan calls for $1 billion in additional loans to be made available for distributed energy projects that aggregate numerous distributed energy resources in new and cost-effective ways. Clean energy technology will also be more readily available for residential customers through improvements being made to the property-assessed clean energy (PACE) program. The plan will also allow for significant innovation in distributed energy projects.

Challenges and Potential

While decreased oil prices and a struggling global stock market have had an immediate negative impact on the renewable energy industry, significant policy changes will allow companies the opportunity to fund innovative distributed generation technologies moving forward.


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