Everything seems to be going social these days, from media to chat to sharing. Now you can add economic calculations to the mix of things gaining social meaning and that could impact the energy markets thanks to the social cost of carbon (SCC) becoming an increasingly hot topic these days. Considering the Obama administration recently upped the social cost of carbon by 60% to $38 per metric ton, could this mean there soon may be a crude awakening coming to oil? Let’s take a look.
For those not quite familiar with this emerging concept, it is really the idea of trying to pinpoint an economic figure on how pollution impacts society and how cleaner fuels/technologies can potentially save. The figure is very much subjective and is based on a discount rate similar to a net present value (NPV) formula. As you can see from the EPA’s social cost of CO2, the lower the discount rate the higher the social cost of CO2. This is something the Obama administration may be using to make coal mining and oil drilling appear to be even more costly to the environment. This calculation may even play a role in the argument of whether or not to support the Keystone XL pipeline, something many environmentalists want Obama to oppose but recent comments by the President suggest he is thinking otherwise.
If you lower pollution, the social benefit moves higher. This has me thinking the all-the-above energy policy is no longer the focus for Obama, especially with comments the President made earlier this week regarding climate change. To have his legacy be tied to fighting climate change, the President needs to do more than make a commitment on clean fuels and cutting CO2 in his second term. He needs to be bold and truly leave his mark by making energy storage, water conservation, cogeneration plants, biofuels, small modular reactors and offshore wind much more of a piece of our energy future. This would make crude oil less attractive as a dominant source for energy here in the U.S. since CO2 emissions are becoming an increasingly difficult topic to avoid.
Adding to my bearish 2013 view of crude oil is the perception of a rising interest rate environment which could make the exports of liquefied natural gas (LNG) more expensive. This could delay projects and cause more natural gas to remain here at home. In my view this could make the advancement of modern cogeneration plants which can be use for electricity and heat a more appealing (and reliable) idea which could further weigh on oil demand.
Other ideas that could hurt oil demand are more adoption of better mileage hybrid vehicles and EV’s, an increased desire for airline industry to adopt cleaner fuels, a more comprehensive move to cut CO2 and increased growth in energy efficiency initiatives I strongly believe will be led by cleanweb solutions. A weaker U.S. economy thanks to higher rates means less driving. At the end of the day, the recent rise in the 10-yr U.S. Treasury note is catching a lot of people off guard and that is lifting mortgage rates in the process at a time when euphoria in the stock market is becoming more realistic for the back half of the year. This has me thinking we could see weakness in U.S. economic growth in Q3 and Q4 of this year so I’m looking for crude oil to trade in the mid to low $80’s by the end of the year.