How Iran and North Korea Could Wreck California’s Energy-Dependent Economy

Iran OilIt’s difficult to ascertain what non-OPEC, and even some OPEC members will do about future supply cuts and how this will affect the California economy. According to energy trader Martin Tiller, “90 percent compliance is a good sign for OPEC, but Venezuela, UAE and Iraq aren’t following commitments.” Contrary signals are also coming from Nigeria and particularly Libya. New specters of doubt have also been raised whether Nigeria will be able to deliver vast amounts of new oil to the market. This is all good news for OPEC though prices are still struggling to reach the $60-70 a barrel range because of oversupply problems. The market is having a tough time finding equilibrium, and U.S. shale producers are ramping up production, causing prices to stay in the mid 50s. These are all interesting aspects of energy markets, but there are other factors for California to consider moving forward with the state’s energy and economic portfolios.

What California policymakers should begin concerning themselves with more than President Trump’s energy policies, shale producers and OPEC compliance are the two dynamics that could make oil jump significantly in the future – the geopolitical rumblings coming from Iran and North Korea.

These geopolitical-investment risks are financial pieces not being mentioned enough by state agencies responsible for energy regulation, large energy companies such as Chevron based in California, the Legislature and Gov. Brown. Both countries have upped their belligerence towards the world community, and that doesn’t bode well for consumers, which could add further hardship onto California’s economic fortunes.

Recently, the National Iranian Oil Company (NIOC) reported the discovery of multiple new fields with 30 billion barrels of crude reserve, and the Iranians are ramping up production to Europe in spite of other OPEC members cutting back production. NIOC also wants to boost oil production up to 4 million barrels a day.

Higher exports and increased oil production gives Iran billions in additional resources to cause global disruptions. However, the major uncertainties for California and world energy markets are whether the Iranians continue flouting United Nations ballistic missiles sanctions. These actions by a powerful nation and member of OPEC reveal the underlying significance and implications of future California energy developments. With California being one of the largest economies in the world, the economic forecasting entities (whether private or public) need to begin analyzing the Iranian dynamic.

California decision-makers also need to understand that Iran is not the pre-sanction weakling they once were, but instead is a rising global energy powerhouse with the means and capability to develop any type of military weapon system they deem necessary for the regime’s survival.

The western world led by President Obama, with California’s backing, and Iran began pursuing détente towards normalizing relations in 2015 with the nuclear weapon agreement between the P5 + 1. California markets welcomed those stabilizing signals, but that isn’t the case anymore. Iran is now a Middle East hegemonic force that has to be recognized by California citizens, public officials, energy investors and firms.

Nicholas Hereas of the Center for a New American Security believes:

“In order to confront Iran or push back more fiercely against it, you may find you’re in a conflict far more far-reaching and more destructive to the global economy.”

This plausible scenario could cause California gas prices to return to the days when wars in Iraq, continued Sunni-Shiite tensions and Hezbollah (an Iranian military proxy) fighting Israel in Lebanon caused oil to rise above $100 a barrel. Only focusing on supply and exploration & production (E&P) profitability without considering geopolitical-investment risk is either a boom or a curse for California. Hedge funds have taken historic long bets on oil rising, but wars and conflicts cause markets and governments to move in unforeseen ways. And with companies such as PIMCO and other investment management firms based in California this could open up our economy to a host of unforeseen risks.

This is why the Institute for the Study of War in a recent report said:

“For the first time in its history, Iran has developed the capacity to project conventional military force for hundreds of miles beyond its borders. This capability, which very few states in the world have, will fundamentally alter the strategic calculus and balance of power within the Middle East.”

These are turbulent winds to not take Iranian threats seriously. Having state investment pension risk equations that don’t account for how Iran acts in the Middle East now that their influence stretches from Tehran to Mediterranean while simultaneously fighting conflicts in Syria, Iraq and Yemen seems misguided. Moreover, they command tens of thousands of proxy militias, and without factoring these real-world facts into the price of servicing California’s trillions of dollars of debt doesn’t seem prudent either. Unfortunately, political risk and production are now equal partners when it comes to Iran and California’s economic stability.

North Korea is never mentioned in relation to California oil prices, but could very well be the biggest reason gasoline prices skyrocket at the pump. Thae Yong-ho one of the highest-ranking officials in the North Korean government to ever defect ardently believes Kim Jong-un would attack the U.S. with nuclear weapons if his regime were on the brink of failure. Mr. Yong-ho further elaborated the North Korean leader lives a secretive, isolated life that includes no one having the location of where he even lives. Kim Jong-un is further painted:

“His ability to wreak harm should not be underestimated if his very survival were threatened he would lash out and destroy whatever he could and once there was an effective nuclear arsenal the leader would be prepared to use it.”

In early February, North Korea tested a ballistic missile, which could be used to further its quest for an intercontinental ballistic missile (ICBM) that could eventually strike California. A U.S. Pentagon spokesman, Navy Captain Jeff Davis stated:

“North Korea openly states that its ballistic missiles are intended to deliver nuclear weapons to strike cities in the United States, the Republic of Korea (South Korea), and Japan.”

For California officials to not imagine a scenario where North Korea has the ability to strike major oil producers and consumers doesn’t seem shrewd. The difficult part for California energy regulators, energy firms, and consumers are how to measure the likelihood of North Korean belligerence into our economy?

Additionally, China is now angered that North Korean and Iranian sanctions placed on those countries have now affected Chinese firms. China has close economic and diplomatic ties with both countries, but particularly North Korea whom they share a border with on the northeastern part of China. North Korea needs China since they are its biggest trading partner along with its main source of food, arms and energy. Despite all this, China has allowed North Korea to continue multiple nuclear tests, and doesn’t appear likely to stop them anytime soon. This seems a perfect opportunity for Gov. Brown to push for closer ties between China and California to counter this risk.

Long-arching trends have been building up between North Korea and western-aligned nations for decades. At least Iran has OPEC to constrain them, but seemingly North Korea only has China to keep them from having a negative enduring impact on the global economy. Therefore, would China allow North Korea to fire off an ICBM towards California if that would have a lasting impact on their ability to grow their economy without abundant fossil fuel availability? The South China Sea standoff is just one example when confrontational geopolitics and economic trade collide – and the results can be disastrous – unless properly managed.

Relative oil and gas price stability has returned since prices have risen the last few months, but 2017 could see energy upheaval. Likewise energy asset prices for California could swing wildly, not at all, or somewhere in between. But geopolitical tumult could cause everything within the California energy value chain to wildly escalate; catching the state flat-footed the way the housing crisis in 2008 caught many banks off guard. The economics of oil and gas can manifest frustration in many ways, but what California officials at the local, county and state level shouldn’t overlook are how Iran and North Korea are shifting global conditions and energy markets.

Todd Royal is a geopolitical risk and energy consultant based in Los Angeles.

Renewables Have Glaring Obstacles to Overcome for California

Solar panelsBloomberg is now reporting that solar energy is cheaper than coal, and could become the lowest form of energy within a decade. Economies of scale are causing solar to drop from an average of $1.14 a watt all the way to .73 cents per watt by 2025. This should be great news for California’s overwhelming embrace of renewable energy.

Agencies such as the U.S. Department of Energy’s National Renewable Energy Lab to the International Energy Agency all confirm this decline in costs. Capacity for solar is doubling causing lower costs for bank loan premiums and manufacturing capacity in the solar energy space; and now with Tesla’s gigafactory opening, the cost of batteries is also expected to drop for electric vehicles and home battery systems.

China also plans to invest over $360 billion on renewable energy and fuels to help decrease their serious smog issues. Unsafe, coal-fired power plants are currently suffocating that country’s air supply. And California can feel the affects of China’s crippling smog depending on seasonal wind patterns.

California could be entering a new era in energy, and an era renewable investors and environmental advocates have been touting this century. Unfortunately they are overlooking glaring weaknesses, and for renewables to truly breakthrough into a low-cost, scalable energy along the lines of coal, oil and natural gas numerous obstacles such as costs, back-up generation power, storage and grid modernization will need to be solved.

Gov. Brown, the California Legislature and the California Air Resources Board need to understand the true costs and limitations at this time when using renewable energy.

Yes, costs are possibly going down for solar and wind, but is that truly the case? And while costs for manufacturing and kilowatts per hour are dropping that isn’t the final costs when it comes to renewables. The BP Statistical Review of Global Energy in 2015 showed renewables provided only 2.4 percent of total worldwide energy needs, hydroelectric power generated 6.8 percent and nuclear came in at 4.4 percent. California citizens and businesses need clean fuel, and at this time renewables can’t provide that for them.

Moreover, no matter how much renewables are touted as a replacement for fossil fuels, and even with positive economies of scale, they still will not overtake coal, oil and natural gas in the near future even with AB32 and SB32 in effect.

Weather is the biggest hindrance for both solar and wind, but not as much for biomass or hydroelectric – though hydroelectric, or the process of damning water for electric use, can run into serious environmental issues. But if the sun isn’t shining and the wind isn’t blowing then solar and wind become difficult to use without fossil fuels – particularly natural gas and coal-fired power plants – backing them up. Additionally, batteries have not caught up to enhanced storage for renewables, and they aren’t productive enough for entire California cities, counties and the state at-large.

When looking at the total cost of renewables versus fossil fuels there really isn’t a comparison in the near-term future because wind and solar can only generate intermittent electricity. Fossil fuels can run without backup supplies, and then factoring in levelized costs for renewables makes them under-productive and more expensive as a wide-scale energy source for California.

As much as California continues using renewables it still hasn’t been achieved without fossil fuels backing them up. The Energy Information Administration’s Annual Energy Outlook 2017 to 2050 (page 13) only has renewables at 18-26 percent penetration by 2050 in the United States. The equivalent of not understanding the facts about renewables are how electric vehicles currently only have 1 percent of the market and are projected to only have 6 percent by 2040, but are highly touted as being able to replace the combustible engine vehicle.

Energy storage and grid modernization are separate issues for California policymakers to understand, yet the two issues are linked together in many ways. How energy is stored from fluctuating renewable sources (wind and solar) are needed to accommodate, “multiple grid services, including spinning reserve and renewables integration.” To improve the problem of intermittent generation for resources such as wind and solar the EIA recommends:

“Examine the potential for transmission (grid) enhancements to mitigate regional effects of high levels of wind and solar generation while developing higher resolution time-of-day and seasonal value and operational impact of wind.”

Further, the EIA also perceives utility rate structure for different levels of photovoltaic solar generation being needed to control costs for consumers and industry when using renewable energy. What the EIA is saying is that renewables fluctuate in power generation based upon different weather patterns, which causes the grid to fluctuate. These upward grid spikes are then passed on in higher electricity costs to utility’s customers. It is one of the reasons California has some of the highest energy costs in the United States due to its heavy reliance on renewable energy.

The most important component in the entire process of renewables overtaking fossil fuels for a cleaner future is grid modernization. According to T. Boone Pickens, “The electrical grid of the future will have to be built,” for renewable energy to overcome the above-mentioned hurdles. With California’s exploding pension costs it is difficult to envision a brand new, multi-trillion dollar grid being built in the near future.

Renewable energy has incredible potential for California, but until power grids are modernized renewables will lag behind fossil fuels through rising costs and unstable energy delivery. California’s electric grids can’t handle millions of electric vehicles, varying, spiked energy from wind and solar and the ability to be flexible the way a natural gas power plant is at this time. The best power plants for energy efficiency and lowering carbon emissions while keeping costs reasonable are natural gas. A natural gas-fired power plant is the biggest reason coal is losing market share in the United States.

Majorities of Californians want renewables to be the number one source of energy in our state’s portfolio for cleaner air, water and a healthier environment. But instead, renewables like electric vehicles have taken on a fad-like quality without the technology having caught up to the hype. CARB needs to look at the facts, and not the emotions that currently lead the renewable energy debate. Let’s not pit renewables against fossil fuels, but look to incorporate the different energy sources into what’s best for California and the United States.

Todd Royal is a geopolitical risk and energy consultant based in Los Angeles.

What President Trump Will Mean for California’s Economy

donald-trump-3Since Trump’s election we’ve seen a national rebound in consumer, small business and large corporate confidence. The American business and worker class seem to be saying what Californians don’t want to hear: We want an economy not stifled by environmental and tax regulations. We want a president that understands, “It’s the economy, stupid!” California once had that type of mentality, but now with an economy that mostly produces temporary, low paying, service sector jobs where are the positives for the California economy?

The answer is everywhere. Progressive policies were a great idea over a hundred years ago when they were meant to curb female abuse at the hands of alcoholic husbands, child labor in Chicago meatpacking sweatshops epitomized in Upton Sinclair’s, The Jungle, and breaking down corporate monopolies. Former President Theodore Roosevelt led that charge for the working man and woman.

That day has passed, and now gentrified environmental billionaires such as Tom Steyer and his legislative lackeys tow the global warming line for coastal elites. Unfortunately, most of California – and even wealthy Los Angeles – suffer the policies of leaders such as Senate Pro Tem Kevin de Leon’s job killer bill like SB32 and the boosting of AB32 into further restrictions on economic growth.

There isn’t a green economy that comes close to what Trump is proposing to do for energy exploration on public and private lands. Factually, there isn’t such a thing as the California green economy. It doesn’t exist. Nor does it produce anything resembling large-scale economic progress the way oil and gas exploration produces millions of jobs, and billions of tax revenues.

This is what President Trump will pursue when it comes fossil fuel extraction as a nationwide policy. And this will include California, especially if Trump does away with the moratoriums on deep water drilling for oil and natural gas off the California coastlines.

California has billions of barrels of oil and trillions of cubic feet of natural gas. The tax revenue produced by this could turn California into an economy that could reach the second largest in the world. If California would turn their back on the fallacy of the green economy and embrace sensible exploration our public schools could be the envy of the U.S., our infrastructure needs taken care of without tax increases, and a true, thriving middle class. Not the progressive haves and have-nots currently seen in California.

This is what Trump has in mind for the U.S., and dare it seems California could be on his radar to expand American energy opportunities.

Trump’s cabinet picks have all indicated economic growth will be their number one priority, and re-establishing America’s preeminence in the world through a larger blue water navy. What this means for California is hard to understand, but one thing is certain, the tech sector will see growth supplying the U.S. Navy with state of the art software. But China’s recent belligerence could be a bellwether of things to come for California’s economy; if the Chinese begin to make their markets even tougher to enter, this doesn’t bode well for California exports.

Sanctuary cities in California could also see a hit with cheaper labor on the downturn if Trump keeps his campaign promises and begins deporting illegals that are criminals, and not allowing the DREAM Act to continue through executive action. The rush for asylum could see Trump’s Justice Department and I.C.E. taking on Gov. Brown and the California Legislature.

Does California have the stomach for federal funds being cut off? Trump doesn’t need California, more than California needs the president-elect, and the federal dollars he is soon to control. The politics of this issue could be a harbinger for the legal fights and strength of the federal government California will be dealing with in 2017. What happens when Trump appoints the next Supreme Court justice, and then could go after the special status of illegal aliens/undocumented immigrants. California will lose. It’s hard to imagine Brown and the Legislature along with the Congressional delegation negotiating sensibly with Trump and his administration.

Special status will be reserved for California’s fixation on global warming led by Gov. Brown and coastal elites in San Francisco and the west side of Los Angeles. When Trump and his cabinet increase energy, but not necessarily renewables, California laws – AB32 and SB32 – won’t have the ability to make much of a difference. Though they don’t really work as intended anyway.

And with economic growth taking precedence over Paris Climate Agreements and the Clean Power Plan the rest of the U.S. will need cheaper energy that oil, natural gas and coal provide. Further, California’s dream of electric vehicles, solar panels and windmills powering California will not grow and the bullet train will be dead on arrival for the incoming administration and Congress.

California will also not be able, or allowed, to stop shipments of coal that the Obama administration encouraged and certainly didn’t stop. Not to mention the legality of the issue. California again will run into a juggernaut of federal laws, regulations and a hostile federal government if coal shipments are not allowed through California ports to reach an energy hungry China, India and the rest of Asia. Those are American jobs, and votes for Trump’s re-election that he more than likely won’t allow California environmental policy to dictate how and where coal is shipped from our ports. Global warming won’t be high on Trump’s vision of American growth, and it was misguided policy by the Obama administration that hurt Americans of all economic stripes.

We’ve already seen how Trump has dictated new water policies to California that doesn’t involve climate change, or EPA policies curbing manufacturing, but instead showed how water enhancement can assist farmers and development in the Central Valley. Anything that grows the economy will be at the forefront of the Trump administration, and not the reduction of greenhouse gases. These were all economic harbingers shunned by California and the Obama administration’s Commerce, Interior and Energy Departments along with his EPA. That won’t be the case with President Trump.

Economic opportunity will rule the next four years, and because California supported President Obama’s use of executive orders, and his famous, “I’ve got a pen and I’ve got a phone,” form of governance, California can expect the same. The expansion of federal powers under Obama will be stretched to block California progressive laws that don’t coincide with Trump’s presidency.

A Republican House and Senate will thumb their nose at California’s economic and social gains seen under Obama that will be hard to stop if Trump decides he’s had enough of our voter’s malfeasance towards him. The problem with supporting Obama’s way he governed by executive fiat won’t be able to counter Trump is moving beyond the Constitution since that is what Obama has done for eight years with California supporters cheering his every step.

California was certain that Trump would lose and Clinton would expand every social whim most of America finds disdainful. Economic reality will be coming to California and our environmental laws, because Trump can ignore this state for his entire presidency. If you take away California’s bloated vote totals then he won the popular vote by over 1.6 million. We better understand a new dawn is arising, or our economy could be left behind in more ways than we can imagine.