Guilt by Association
“Excess is success.” – Robert Cavalli
Readers of a certain vintage may recall hearing stories of thrift from grandparents or great-grandparents who survived the Depression era. Stale bread ends mashed into crumbs to bolster meager portions of meat, coffee tins cleaned and repurposed around the house, pencils cherished while still bearing any trace of usable lead, stashes of string at any length squirreled away for a second (or third or fourth) life.
Today, the practice of re-use has been merchandised as “upcycling.” Old-becoming-new-again items (and new-but-old-looking ones) are purchased online in one part of the world to be shipped to another in a mountain of cardboard boxes and bubble pouches, all to create just the right “shabby chic” vibe.
Truly resourceful thrift – good to the last drop – is born of both necessity and economics. It is also the backbone of the petrochemical industry where byproducts — the “leftovers” from the manufacturing process — represent a perennial challenge.
If a reactor makes an important primary product but also produces a meaningful amount of another, something must be done with that extra material. In extreme circumstances, the unwanted stuff is sold for a pittance or even given away — either option superior to the expense of having it incinerated or landfilled. Entire businesses have been created to take advantage of such quirks of chemistry.
Perhaps the most economically significant example of this phenomenon is the creative use of virtually all the molecules in a barrel of oil. Given the sheer scale of the oil refining industry, wasting even a small percentage of the processed material is untenable. This is how it came to be that 94% of all US roads are paved with asphalt, a product derived from bitumen, the “still bottoms” of a barrel of oil. While the primary purpose of a refinery is to produce gasoline, diesel, and jet fuel, outlets are found for the entire barrel.
A classic byproduct conundrum is currently crushing the price of natural gas in several parts of North America. In the fastest-growing regions of the shale patch, many oil wells concurrently produce natural gas. With oil prices remaining elevated, the incentive to keep pumping is high, turning the resulting gas into a growing nuisance. This is especially true in the Permian Basin where so-called “associated gas” is flowing at record levels. As Barron’s correctly explained in a recent piece titled Natural Gas is the Big Loser From OPEC’s Production Cut, the global geopolitical chess game being played on oil supply is resulting in a glut of cheap natural gas that is regionally trapped in the US (emphasis added throughout):
“The problem for natural gas stocks is that high oil prices are likely to affect them negatively. With oil prices on the rise, oil producers are incentivized to drill more. In the U.S., most oil drilling happens today in shale-rock formations that produce both oil and natural gas. So as oil production rises, natural gas production does too—analysts call this ‘associated gas.’ Although the oil market is tight, the U.S. natural gas market is already oversupplied. So any further incentive to produce more of it is likely to weigh on natural gas stocks.”
What a fascinating dilemma!
The cleanest of the fossil fuels – a molecule in such high demand around the world that it traded hands at 50 times the current US benchmark price in Europe only months ago – is now available in certain parts of the US for energy-equivalent prices of less than $10 a barrel oil. The wasteful handling of this vast bounty of energy is tragically departed from what could be done under a more practical energy policy regime. Let’s examine the options.