Oil and governance

As prices at the gasoline pump continue to rise, President Barack Obama's approval ratings appear to be falling. It is clear Americans are dissatisfied with the national energy agenda.

A recently released University of Texas at Austin energy poll reveals that 50 percent are dissatisfied with the way President Obama handles energy issues and 68 percent are dissatisfied with the way Congress handles those same issues.

Varun Rai
Assistant Professor Varun Rai. 

But how much control does the American government really have over the price of gas, and energy, in general?

According to Varun Rai, assistant professor at the Lyndon B. Johnson School of Public Affairs at The University of Texas at Austin, the U.S. government does not have much control over the world oil prices in the short run, despite having helped drive down Americans' dependence on foreign oil in recent years.

Rai says that's because the oil and gas industry doesn't follow what students learn in Economics 101.

"About three quarters of the global oil supply comes from countries with nationally owned oil companies that despite vast resources underground are either unable or unwilling to produce more oil," said Rai, who is the author of two chapters in the recently released book titled "Oil and Governance: State-Owned Enterprises and the World Energy Supply" (Cambridge University Press, 2011).

The oil market acts differently than other markets because of the inner-workings of many nationally owned oil companies (NOCs) across the globe, says Rai.

"Nationally owned oil companies are different from privately owned international oil companies," says Rai, "Government ownership adds a lot of complexity, which makes the job of NOCs a lot more intricate than just producing gas and oil. In many cases, the nationally owned companies are piled up with a bunch of social and political objectives."

For instance, the Petróleos de Venezuela, the country's NOC, is required to spend 10 percent of its annual investment budget on social programs.

In normal markets, says Rai, when prices go up, supply also goes up because earning profits drive most companies to produce more oil. The privately owned oil industry follows this pattern but the NOCs do not.

"There are two types of NOCs," says Rai. "One type are companies, such as Saudi Arabia's Aramco, that could increase production but do not because they are already taking in trillions of dollars and don't have enough avenues to invest the extra monies in profitable ways."

Natural gas drill on a hilltop
Natural gas drill on a hilltop. 

The other type of NOCs, says Rai, are less stable. These include the Nigerian National Petroleum Company, for which an increase in price represents much more to fight for. According to the Congressional Research Service, Nigeria's revenue from oil tops $50 billion per year but the majority of its citizens live in poverty.

"There are many different factions who want control over the oil and gas industry and that leads to internal strife and violence," says Rai. "When there is violence, production suffers. Instead of increasing, there actually might be a decrease in their production."

So when prices go up, production either stays the same or bends backward for a significant portion of the NOC universe.

"If you're looking over the long term, we have to be more serious on the demand side," said Rai. "We have to be more serious about the efficiency of our cars, electric vehicles and how we use our oil and gas."

The United States may have little control over the vagaries of many of the world's NOCs, which own about 70 percent of oil and gas reserves and are responsible for about 60 percent of the world's production, but a new industry emerging in the United States may be transforming our own internal energy outlook.

Charles Groat, professor at the Jackson School of Geosciences and an associate of the university's Energy Institute, recently led a major research project into the shale gas industry inside the United States.

Charles Groat
Professor Charles Groat. 

Shale gas is natural gas that is trapped in shale rock formations and must be extracted through hydraulic fracturing, a method where special pressurized fracturing fluids are used to extract gas and oil.

"The increase in production of shale oil and gas in the United States has been a game changer," said Groat, who also has a joint appointment with the LBJ School of Public Affairs. "Shale gas has gone from a 10-year resource base to maybe a 100-year resource base, and it has mellowed the price structure so we are no longer hearing portent of volatile natural gas prices."

The Energy Institute this year released a report titled "Separating Fact from Fiction in Shale Gas Development." It found that widespread use of hydraulic fracturing and horizontal drilling has transformed the outlook for U.S. energy, providing clean and affordable energy that will enhance our nation's energy security.

Oil and gas companies consider information about the composition of their fracturing fluids to be trade secrets, which has raised concerns among environmentalists, especially about water safety if the fluids were to leak into drinking water.

"There has been much concern that this fracturing process was going to open up cracks that would move the fluids up through the rock column and into ground water," said Groat. "What we found was that there is no evidence that fracturing came anywhere close to getting anything into the shallow ground water."

According to Groat, not only is there no evidence that fracturing does not contaminate groundwater, but that an increase in the production of shale gas and oil could have a positive environmental affect.

"This goes far beyond just the supply of gas," says Groat. "It proliferates through the different parts of the economy in a very positive way, including environmentally because natural gas is a lower greenhouse gas emitter than is coal or burning liquid fuels."

In addition to environmental benefits, an increased supply of natural gas has important implications for the power industry, says Rai.

"How do you use all of this shale gas? The first thing is obvious: using gas in the electricity infrastructure," says Rai. "Gas is lower in carbon, we have plenty of it and it's cheap. Most of the electricity infrastructure, at least over the next 10 years, will all be based on natural gas."

But that isn't enough, says Rai. There is so much natural gas available now in the United States that the nation needs to find different ways to make use of it all.

And for that, Rai suggests turning to the automobile industry to produce more vehicles that run on natural gas. But perhaps the more promising route is to convert natural gas to electricity, which can power electric vehicles. Indeed, he says, we are starting to make some noticeable progress on electric vehicles in the U.S.

With increased production of natural gas from shale comes an increased production of oil, which is often a by-product of shale gas development, says Rai.

"As we know with the high prices of oil that you are seeing today, that is very valuable," said Rai. "Many of the shale gas producers are focusing now less on shale gas and more on the liquids production. This is good because it helps us take some of the pressure off of the Middle East and for reducing our dependence on foreign oil."

According to the recent Energy Institute report, shale gas production is regulated on the state level. Any federal regulations may only come if states do not do a good job of controlling environmental outcomes, says Rai.

However, regulations do not translate into increased control over domestic energy prices. According to Groat, the national government has virtually no influence over the cost of energy or the amount of shale oil and gas produced domestically, says Groat.

"The president could influence gas production on federal lands through leasing programs there, but this would be very indirect and not have much short-term impact," says Groat.

Regulations, which some say could slow down production and, subsequently, the nation's newfound foothold in energy security, are going to remain as they are for at least the near future, says Rai.

"It all boils down to us doing more work on understanding the impacts," says Rai. "Once those are clear, and if the states are not doing a good job, the federal government will have to kick in. Otherwise, states can continue regulating. But the big question is, what are those impacts?"

That's where researchers like those who worked to complete the Energy Institute's report on shale development come into play, says Rai.

"This is where The University of Texas at Austin is leading the way," says Rai.