Is Regulation Killing American Energy?

Regulation is killing American business by making energy more expensive. Regulation is killing the coal industry and keeping us from extracting natural gas that could heat and power our homes. Regulation has stifled oil production on both private and federal land.

These are the "facts" being reported on commercials, television stations, online outlets, and by political candidates, but I wonder how true they are? I'd think that maybe I'm an "energy voter" and if there is more than anecdotal evidence that regulation is having an effect on what we pay for electricity, natural gas, and oil, then it may swing my opinion.

When I think about these questions, I like to know the facts -- that's exactly what I've gone in search of today. There are a lot of factors that affect energy production, but if there are clear trends in production and/or pricing, then we should be able to draw some conclusions.

Is electricity more expensive?
The coal industry is in shambles because of regulation, or that's what some would like you to think. Coal is an abundant resource in the U.S. and I do not doubt that regulation has had an impact on the state of the industry.

Two months ago, when Patriot Coal was forced to file for bankruptcy I cited over 100 coal plant closures in the U.S. as one of the main reasons. Cliffs Natural Resources (NYSE: CLF  ) earnings fell 38% in the second quarter and the stock is down 43% over the past year. Arch Coal (NYSE: ACI  ) is in even worse shape, posting a $2.05 loss last quarter and seeing its stock decline 64% over the past year. So the struggles of coal companies must be making energy more expensive, right?

The answer is a definitive -- not really. The cost of electricity has risen every year since 2002, but the rate of growth has slowed in the last three years.

Source: U.S. Energy Information Administration

From 2002 to 2008 the price of residential electricity grew 4.9% annually, but from 2008 to 2011 the rate of growth declined to 1.6%. If we look at all sectors, including commercial and transportation, the price rose 0.8% from 2008 to 2011, down from 5.2% annually from 2002 to 2008.

There are a number of factors that go into the cost of electricity, including cost of fuel and demand from customers, but electricity demand is relatively stable. With most utilities in the U.S. operating in regulated areas the price per kW-hr could conceivably increase even if demand was down.

The problems for coal have largely been driven by another fossil fuel -- natural gas. Is regulation impacting electricity prices negatively? Maybe. But the evidence shows that price growth of electricity has slowed in recent years, not picked up.

Is the cost of natural gas up because of regulation?
There has been a lot of debate about the effect of regulation on natural gas drilling. Those opposed to drilling say there's not enough regulation, those who are for drilling say there's too much. But the question is: Where is production and pricing headed?

It is absolutely clear by the chart below that production is up and prices, both residential and electrical, are down since the recession:

US Natural Gas Marketed Production Chart

US Natural Gas Marketed Production data by YCharts

Companies like Chesapeake Energy (NYSE: CHK  ) and ExxonMobil (NYSE: XOM  ) have cited prices as the main reason they're slowing the production of natural gas. Regulation may play a role, but with prices dropping since their peak in 2008, it's no shock that the industry is starting to cut back.

Again, there is little evidence that regulation has caused a meaningful slowdown in production or an increase in price. In fact, the opposite appears to be true.

Has regulation hurt oil production?
Now for a much harder question: Has regulation or those who hold the keys to offshore and onshore drilling on federal lands slowed oil production growth?

We do know that U.S. oil production is up since 2005 and that imports as a percentage of consumption have been falling since the same time. But, over the last three years, we can see that production in federal waters is down and the same can be said for production on federal land.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

The number of drilling permits approved on federal lands averaged 4,274 from 2009 to 2011, down from 6,826 in the three years prior.

So, we know for sure that drilling is down on federal land and water. One reason for the decline in offshore production is likely the Deepwater Horizon disaster and resulting moratorium. Drillers have also had a hard time getting shallow water rigs back to work, and companies like rig owner Transocean (NYSE: RIG  ) have begun dumping their shallow water rigs. At the same time, ultra-deepwater drilling couldn't be stronger, which is something to keep in mind.

I will say that the reduction in drilling on federal land very well could be due to the government not issuing enough permits, but must point out that the amount of acres sought by the industry has also fallen over the same time. Could this be because the government wouldn't approve them anyway? It could be.

This is a hard correlation to draw because oil production is up dramatically in the U.S. over the last seven years, but it is up on private land like the Bakken Shale. If these private lands weren't so attractive to drillers and they were focused instead on public land, then would the number of permits granted be different? It's impossible to know.

Foolish bottom line
For all we hear about regulation in the energy industry it's hard to see it slowing U.S. energy production as a whole. Has it had a negative impact on coal? Yes. But so has natural gas, and with electricity price growth slowing in recent years it's hard to say that the negative impact on coal has had a negative impact on energy users.

I could make the argument that regulation and foot dragging at the federal level has held back oil production on federal land, but it doesn't appear to be holding back private development or production overall.

Could we be producing more energy with less regulation? Maybe. But, we're producing more energy today than we were three, five, or seven years ago and that's a step in the right direction, whether the industry is too heavily regulated or not. At that very least, regulation doesn't appear to be killing American energy.

If you're a believer in American energy you should check out our report "The Only Energy Stock You'll Ever Need." It highlights a company that's well positioned for industry trends and the report is free when you click here.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of ExxonMobil, Transocean, and Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On September 12, 2012, at 7:40 PM, bunngolf wrote:

    Ask the members of the UMW (United Mine Workers of America) if EPA regulations on coal fired utilities is hurting coal production. You are likely to get an ear full. This will be the first time in my memory the union is not openly endorsing a Democratic Presidential candidate. Hmm, I wonder why. And, if it were not for private land and increased production due to fracking, we would not have had the luxury of increased production.

    The North American energy independence plan by 2020, laid out by Romney, is realistic by utilizing all forms of energy, and streamlining its production and delivery.

  • Report this Comment On September 12, 2012, at 8:56 PM, molasses2 wrote:

    On the electrical delivery side of the house, I can tell you for a fact that NERC and FERC have been causing nothing but headaches for decades.

    Now that NERC compliance is no longer voluntary, electric transmission companies are up to their armpits in bureaucratic nonsense that effectively prevents actual work from being done - or at least being done quickly. And federal regulations are intentionally left open to interpretation so that each company can determine independently whether they are in compliance or not - but God help you if you're not. A *single* violation found by a federal inspector can cost a company up to a million dollars per day until that one violation is rectified.

    Because of this sword of Damocles over their heads, companies are geared toward CYA instead of production and delivery of energy. The fear of making that one mistake that raises the ire of the dragon has everything slowed to a crawl.

    No one wants another epic blackout, but check the history... the blackouts that keep prompting the Fed to step up their meddling are typically followed by even larger blackouts than the previous ones. Tell me that doesn't cost us.

  • Report this Comment On September 12, 2012, at 9:07 PM, TMFFlushDraw wrote:

    @bunngolf

    I think I was pretty clear that coal has been hurt. But it's been made up for by natural gas on a national level.

    This was a broad look at energy not an analysis on a single mine, which has obviously been negative in many areas.

    Travis Hoium

  • Report this Comment On September 12, 2012, at 11:12 PM, FarmBoy64 wrote:

    Hi Travis,

    Something to think about regarding your first chart and the slowing growth of electrical prices -- 2008 is when the rate of growth tapers off but that corresponds with the slower rate of economic growth. I think that a slower increase in the demand for power since 2008 is mostly responsible for what you are seeing in the chart. If we were prospering and demand was higher, the tougher restrictions on the coal industry would really be showing through in higher electrical prices than what we have seen.

  • Report this Comment On September 13, 2012, at 10:00 AM, TMFFlushDraw wrote:

    @FarmBoy64

    This could very well be. You're correct that 2008 was a turning point in demand toward slower growth and it is unknown what would have happened if the economy had kept humming along.

    Travis Hoium

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