The oil industry is settling in for energy prices to stay around their current level for a long time. Alaskans should probably stop hoping for a return to glory days.
Our most valuable commodity has fallen from historic highs to a price that is closer to what it costs to produce in much of the world. That price isn't enough to justify companies going after risky new oil finds in Alaska.
The veering imbalances of supply and demand may cause prices to rise in a few years. A global political crisis can always spike prices. But for Alaska's oil production to recover, investors would need confidence that costly investments would make sense long into the future. That's doubtful now.
I talked to friends in the energy industry in Alaska and read up on what experts are saying around the world. My basic question was how much oil (and gas) is worth, and what it costs to find and produce in Alaska.
In 2004, John Weston, the CEO of Chevron, made a comment suggesting an oil price of $100 a barrel had become the basic rule of thumb for oil development. With oil now selling for less than half that, the major companies have drastically cut costs, hoping to consistently make money on $50/barrel oil.
The stock market isn't buying it. Oil stocks have fallen so far they offer extraordinary dividend yields. That means capital is costly. Investors are unsure about the future.
A small company experimenting with hydraulic fracturing in Texas in 1998 created a lot of this change. Fracking shale began producing oil in places like North Dakota and Pennsylvania where people can drive to work rather than, as here, being flown to Arctic camps on manmade islands.
At first, fracking costs were high, but the industry developed it into a factory operation, building lines of wells across the landscape, bringing down the cost. Some of those wells can make money at $50 a barrel. The price doesn't have to go up much (it's around $49 now) for the frackers to turn up the flow, keeping the price from shooting higher.
This increasing U.S. production from fracking broke the price control of OPEC. Market economics rule oil now, not OPEC sheiks — a point made by Atul Arya of IHS Energy, at the recent 50th anniversary conference of the Alaska Oil and Gas Association.
What's good for America is not necessarily good for Alaska. The OPEC cartel gave Alaska our glory years, its manipulated prices filling our Permanent Fund. But in a free-wheeling market, our high production costs are a problem.
Alaska's existing oil costs an average of $50 a barrel to produce, not including taxes. Some new wells can make money in the $50 to $60 range. But they're near areas where infrastructure already exists.
Oil discovered in new areas has to pay for exploration, development and lifting costs — the combined prices of finding it, drilling for it, processing it and moving it. Alaska's costs are higher for all those components. Combined, they're generally much higher than $60 a barrel. That's true for our undeveloped heavy oil too.
To turn around our oil economy and reverse the decline of production, we would need large-scale new development, with its high costs. At the prices expected now (Ayer doesn't see $100 oil before 2022) only a colossal find would cover the costs.
But the very long-term investments for colossal energy discoveries carry a new risk. Petroleum now has competition.
Utilities' cost for wind energy matches even low-priced natural gas in national averages, according to a study released last year by the Energy Information Administration. Solar is getting close.
If natural gas prices rise, wind and solar get even better, since their fuel is always free. That competition will help hold gas prices down.
Meanwhile, the cost to install wind and solar continues to drop. The price of solar power has declined by 10 percent a year for the last 30 years, according to Tim Flannery, writing in the New York Review of Books.
Both technologies have reached the point where mass production and smart business people are drastically reducing the price. In much of the country, homeowners can buy a solar installation with financing that gives them an immediate reduction in their monthly energy bills, everything included.
A new generation of electric cars bring this price competition to oil as well as natural gas. Popular electric cars with usable ranges are becoming affordable. The energy cost of operating one is already half of an equivalent car with a conventional gasoline engine, according the Department of Energy.
These statements assume many details open for reasonable argument. But the basic point is clear — fossil fuels have lost their monopoly. They now have to compete in a market with renewable energy.
The final part of the challenge is the pollution cost of fossil fuels. The nations of the world agreed last fall to reduce carbon emissions. Economically, that means petroleum users will start paying for some of their environmental impact, reducing the price advantage of the energy source.
It's already happening. China, the world's largest carbon emitter, made enormous investments in renewable energy, beating its carbon reduction goals by two years. China's carbon emissions probably peaked in 2015, experts say. And it just adopted a new, even more ambitious plan.
Power use has been declining even here in Alaska's Railbelt. Energy conservation is working.
This is not exactly bad news. But it does mean our future is not going to look like our past.
The market is efficient and merciless. It will carve the Alaska oil industry into a leaner machine that will continue to make money and stay here for a long time.
But oil won't be a cash cow anymore. Our small state has been through a generation of wealth the like of which the world has rarely seen. In the future, Alaska will survive by competing for every dollar, like everyone else.
Charles Wohlforth's column appears three times weekly.
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