petrocracy1

Sheridan — The ancient Greeks had a word, ?????? or kairos, which means an era of unique opportunity. It’s an unspecified period of time ripe for taking advantage of changing circumstances.

Wyoming and the energy-rich west have an opportunity to at least acknowledge such an era: we live in a time where change occurs at an unprecedented speed.

Wyoming can either react to this acceleration or be dragged along by it, probably a little of both. But we ignore it at our peril.

Two fundamental dynamics drive this increased velocity of change: population growth and communications.

The globe’s population increases by three people every second. The earth’s geography, however, remains static. Rising populations pressure not only energy resources, access to clean water and air, but theories on how to manage them.

Communication of ideas, only a short time ago the province of handwritten documents and those who wrote and read them, has exploded into a million decentralized volcanos.

This combination of scarcity and blindingly fast communication means events unravel quickly. For several years now, energy analysts have predicted a new flood of revenue for Wyoming. Where was the analyst who saw that oil would trade for less than $70.00 a barrel in 2008? Where was the prognosticator who foresaw that Lehman Brother and Bear Stearns would bite the financial dirt?

Likewise, many residents speak with certainty about Wyoming’s energy future. They seem fixated on what they see as a never-ending source of revenue: a dwindling global supply of energy and an increasing need, especially in the developing countries.

Mostly true.

Yet if $3.00-$4.00/gallon gasoline is hard for an American making $46,000 a year to swallow, what it’s like for the average Chinese making $5,400 per year or average Indian, who makes $2,600 per year?

I’m not a Cassandra or a gloom-and-doomer. The world economy will recover. When it does, energy prices will climb, and Wyoming will benefit, at least for awhile. Compared to other states, Wyoming is in catbird’s seat.

The Consensus Revenue Estimating Group (CREG), a public/private forecasting group, predicts that Wyoming will have a $1.5 billion surplus over the 2009-2010 budget cycle.

Wyoming gets about 70 percent of its income, directly or indirectly, from energy production. Wyoming has the lowest Economic Diversity Index (a measure created using the North American Industry Classification System) in the nation.

In the last four months, the price of natural gas at the Henry Hub has been halved from $13.28/mcf (cubic feet) to $6.60/mcf. Natural gas has price cycles and is usually higher in the winter due to demand. Still, given that each $.10 drop in natural gas prices costs Wyoming $23 million in annual revenue (severance tax collection), this $6.00/mcf drop cost the state roughly $514 million in 2008.

Ditto, the price of oil. Each dollar drop in the price of oil cost Wyoming $6 million per year. In May, Goldman Sachs predicted that oil could reach $200/barrel by the end of 2008. Yet in the last six months, the price of West Texas intermediate crude halved, dropping from $145.00/barrel to $68.00/barrel mid-October. Goldman Sachs, long considered the citadel of Wall Street, had its own halving. Its stock dropped from $208 per share in January to $99.00 in the second week of October.

For the past five or six years, Wyoming has been lulled into thinking its main challenge is finding a safe big enough to store all the money that’s rolling in.

Wyoming, in fact, is a petrocracy. Like all petrocracies from Saudi Arabia to Venezuela to Alaska, Wyoming is exceedingly vulnerable, as the last four months OF downward spiraling prices have shown. While Wyoming’s leaders acknowledge that countries or areas with economic diversity prosper, there’s no impetus to emulate such a model. In fact, there seems less interest here in a mixed economy here than in Saudi Arabia.

The world is struggling to wean itself off of what Wyoming offers, especially coal, which the state has in mass quantities. Because of our dependence on energy wealth, Wyoming quickly feels any seismic shift in the globe’s economic and political plates: carbon sequestration, new technologies, market speculation, or a slowdown in the developing world. (China, for example, just had its slowest growth in five years.) These threats may seem remote; few predict the dramatic busts of the past. Yet single-driver economies like Wyoming’s remain captive to commodity markets and policy.

In 2007, the world invested $148 billion in clean energy technology. Money of this magnitude drives innovation. Wind and solar energy, long pooh-poohed as insignificant, will probably come on line faster than people think. The Hess (an international oil and gas company that does everything from pump it out of the ground to pump it into your tank) Corporation’s investment in fuel cell technology doesn’t bode well for Wyoming’s long-term economy. Neither does the fact that Mercedes wants to eliminate gas and diesel engines by 2015.

Besides, the world has a lot of natural gas, the carbon-based fuel of the immediate future. Lucky for Wyoming, most of isn’t in the lower United States. Not yet anyway. It’s in Qatar and Russia. Liquified natural gas imports will alter that picture. If Alaska ever gets its act together on its natural gas pipeline, THEN Wyoming can count on serious competition for pricing. The hottest gas play in the U.S. is no longer the Jonah Field, it’s the Marcellus Shale in West Virginia, Pennsylvania, and New York. Earlier this year, two academic geologists stunned the world by announcing they estimate the Marcellus Shale has 50 trillion cubic feet of recoverable gas. The Jonah Field above Rock Springs has about 10 trillion, all in a very small area, which is highly efficient for production.

Stanford economist Paul Romer once said that a crisis is a terrible thing to waste.

One might say the same of opportunity. The last four months of price drops in oil and gas reveal how exposed Wyoming is to actions beyond its control.

Boy, is that ever a familiar lament.

It’s more than just diversifying our economy, which is vital, it’s about acknowledging the limited lifespan of America’s BTU central. Think of this historical moment, a financial version of Andy Warhol’s 15 minutes of fame. If Lehman Brothers, founded 41 years before Wyoming became a state, can be brought low by its own hubris, so can we.

Resource Links:

CREG Monthly Report, Revenues Through Sept. 2008.

United Nations Environment Programme, article.

Samuel Western

Samuel Western of Sheridan is a university lecturer, poet and U.S. regional correspondent for The Economist. He is the author of Pushed Off the Mountain Sold Down the River: Wyoming’s Search for Its...