My Top 10 Energy Related Stories of 2009

Here are my choices for the Top 10 energy related stories of 2009. Previously I listed how I voted in Platt’s Top 10 poll, but my list is a bit different from theirs. I have a couple of stories here that they didn’t list, and I combined some topics. And don’t get too hung up on the relative rankings. You can make arguments that some stories should be higher than others, but I gave less consideration to whether 6 should be ahead of 7 (for example) than just making sure the important stories were listed.

1. Volatility in the oil markets

My top choice for this year is the same as my top choice from last year. While not as dramatic as last year’s action when oil prices ran from $100 to $147 and then collapsed back to $30, oil prices still more than doubled from where they began 2009. That happened without the benefit of an economic recovery, so I continue to wonder how long it will take to come out of recession when oil prices are at recession-inducing levels. Further, coming out of recession will spur demand, which will keep upward pressure on oil prices. That’s why I say we may be in The Long Recession.

2. The year of natural gas

This could have easily been my top story, because there were so many natural gas-related stories this year. There were stories of shale gas in such abundance that it would make peak oil irrelevant, stories of shale gas skeptics, and stories of big companies making major investments into converting their fleets to natural gas.

Whether the abundance ultimately pans out, the appearance of abundance is certainly helping to keep a lid on natural gas prices. By failing to keep up with rising oil prices, an unprecedented oil price/natural gas price ratio developed. If you look at prices on the NYMEX in the years ahead, the markets are anticipating that this ratio will continue to be high. And as I write this, you can pick up a natural gas contract in 2019 for under $5/MMBtu.

3. U.S. demand for oil continues to decline

As crude oil prices skyrocketed in 2008, demand for crude oil and petroleum products fell from 20.7 million barrels per day in 2007 to 19.5 million bpd in 2008 (Source: EIA). Through September 2009, year-to-date demand is averaging 18.6 million bpd – the lowest level since 1997. Globally, demand was on a downward trend as well, but at a less dramatic pace partially due to demand growth in both China and India.

4. Shifting fortunes for refiners

The Jamnagar Refinery Complex in India became the biggest in the world, China brought several new refineries online, and several U.S. refiners shut down facilities. This is a trend that I expect to continue as refining moves closer to the source of the crude oil and to cheap labor. This does not bode well for a U.S. refining industry with a capacity to refine 17.7 million barrels per day when total North American production is only 10.5 million bpd (crude plus condensate).

5. China

China was everywhere in 2009. They were making deals to develop oil fields in Iraq, signing contracts with Hugo Chavez, and they got into a bidding war with ExxonMobil in Ghana. My own opinion is that China will be the single-biggest driver of oil prices over at least the next 5-10 years.

6. U.S. oil companies losing access to reserves

As China increases their global presence in the oil markets, one casualty has been U.S. access to reserves. Shut out of Iraq during the recent oil field auctions there, U.S. oil companies continue to lose ground against the major national oil companies. But no worries. Many of my friends e-mailed to tell me that the Bakken has enough crude to fuel the U.S. for the next 41 years…

7. EU slaps tariffs on U.S. biodiesel

With the aid of generous government subsidies, U.S. biodiesel producers had been able to put their product into the EU for cheaper than local producers could make it. The EU put the brakes on this practice by imposing five-year tariffs on U.S. biodiesel – a big blow to U.S. biodiesel producers.

8. Big Oil buys Big Ethanol

I find it amusing when people suggest that the ethanol industry is a threat to the oil industry. I don’t think those people appreciate the difference in the scale of the two industries.

As I have argued many times before, the oil industry could easily buy up all of the assets of ethanol producers if they thought the business outlook for ethanol was good. It would make sense that the first to take an interest would be the pure refiners, because they are the ones with the most to lose from ethanol mandates. They already have to buy their feedstock (oil), so if they make ethanol they just buy a different feedstock, corn, and they get to sell a mandated product.

In February, Valero became the first major refiner to buy up assets of an ethanol company; bankrupt ethanol producer Verasun. Following the Valero purchase, Sunoco picked up the assets of another bankrupt ethanol company. If ExxonMobil ever decides to get involved, they could buy out the entire industry.

9. The climate wars heat up

There were several big climate-related stories in the news this year, so I decided to lump them all into a single category. First was the EPA decision to declare CO2 a pollutant that endangers public health, opening the door for regulation of CO2 for the first time in the U.S.

Then came Climategate, which gave the skeptics even more reason to be skeptical. A number of people have suggested to me that this story will just fade away, but I don’t think so. This is one that the skeptics can rally around for years to come. The number of Americans who believe that humans are causing climate change was already on the decline, and the injection of Climategate into the issue will make it that much harder to get any meaningful legislation passed.

Closing out the year was the United Nations Climate Change Conference in Copenhagen. All I can say is that I expected a circus, and we got a circus. It just goes to show the difficulty of getting countries to agree on issues when the stakes are high and the issues complex. Just wait until they try to get together to figure out a plan for peak oil mitigation.

10. Exxon buys XTO for $41 billion

In a move that signaled ExxonMobil’s expectation that the future for shale gas is promising, XOM shelled out $41 billion for shale gas specialist XTO. The deal means XOM is picking up XTO’s proved reserves for around $3 per thousand cubic feet, which is less than half of what ConocoPhillips paid for the reserves of Burlington Resources in 2005.

Honorable Mention

There were a number of stories that I considered putting in my Top 10, and some of these stories will likely end up on other Top 10 lists. A few of the stories that almost made the final cut:

The IEA puts a date on peak oil production

The statement they made was that barring any major new discoveries “the output of conventional oil will peak in 2020 if oil demand grows on a business-as-usual basis.”

AltaRock Energy Shuts Down

Turns out that deep geothermal, which the Obama administration had hoped “could be quickly tapped as a clean and almost limitless energy source” – triggers earthquakes. Who knew? I thought these were interesting comments from the story: “Some of these startup companies got out in front and convinced some venture capitalists that they were very close to commercial deployment” and “What we’ve discovered is that it’s harder to make those improvements than some people believed.” I am still waiting to see a bonafide success story from some of these VCs.

The biggest energy bill in history was passed

In total, $80 billion in the stimulus bill earmarked for energy was a big story, but I don’t know how much of that money was actually utilized.

The Pickens Plan derails

The website is still there, but the hype of 2008 turned into a big disappointment in 2009 after oil prices failed to remain high enough to make the project economical. Pickens lost about 2/3rds of his net worth as oil prices unwound, he took a beating in the press, and he announced in July that we would probably abandon the plan.

So what did I miss? And what are early predictions for 2010′s top stories? I think China’s moves are going to continue to make waves, there will be more delays (and excuses) from those attempting to produce fuel from algae and cellulose, and there will be little relief from oil prices.

Platts Survey of Top Energy Stories of 2009

As I compile my year end list of the biggest energy stories of the year, I have just gotten an e-mail from Platts that is very helpful. As they have done in previous years, they have a survey up so readers can rank the top stories:

Platts wants to know: the biggest oil stories of ’09

They will publish the results shortly after Christmas. Scanning the list and comparing to my rough draft of the Top 10, I see one story that isn’t currently on my list that I missed: The Valero Foray into Ethanol. Other than that, all of the stories that I have tentatively in my Top 10 are on their list except for two (and I bet people who take the survey will suggest both of them).

I will post my list prior to Christmas, and hope that we don’t see another big year end story like the XOM acquisition of XTO. That is a Top 10 story that came in right at the end of the year. Here is how I ranked the stories Platts had listed, but this was off the top of my head and very subjective. I may decide later on that #3 should really be #8, or that something that didn’t make the list should really be on there. My Top 10 will be a bit different because I have combined some topics that they treated separately.

1. Prices (basis WTI) comes roaring back to the $80 level after almost hitting $30
2. Full-year decline in demand heads toward biggest drop since 1981
3. Natural gas-crude spread in US blows out to unprecedented levels
4. Refinery woes: Valero shuts Delaware City , Sunoco shuts Eagle Point, Repsol shuts Cartegena, Japan cutbacks underway (RR: related to Reliance news)
5. Valero makes big foray into ethanol with multiple ethanol plant purchases; Sunoco follows on smaller scale
6. EU slaps duties on US sales of biodiesel into Europe
7. OPEC holds to its 24.845 million b/d ceiling all year
8. US EPA rules greenhouses gases are a threat to public health, plans on using authority to regulate them
9. ExxonMobil gets into bidding war with Chinese, others over Ghana stake (RR: more for what it signals for the future).
10. Exxon buys XTO for $41 billion

Five Reasons Oil is Headed to $250

Any time I write about investing, I always stress the long-term. Short-term fluctuations don’t drive my investment decisions. I try to see 5 or 10 years into the future, and position myself accordingly. This is a big part of why I started to shift money into oil beginning in 2002; I felt like I could see the supply/demand handwriting on the wall.

My long-term strategy is why I don’t get too excited about oil shooting to $147 or correcting back to below $100. The only question for me is “Will oil be higher or lower in 5 years?” At no point since 2002 have I felt like the answer to that question is “Lower.” I can’t see any combination of alternatives making a serious dent in our consumption until prices are much higher. How much higher? Well, in the Netherlands this summer they were paying $10/gallon for gasoline. Sure, that’s mostly taxes, but consumers were still willing to pay over $400/bbl and alternatives didn’t ride in to the rescue.

Don’t get me wrong, I think alternatives can ride to the rescue – just not until much higher prices force people to cut way back on consumption. As I told someone yesterday, I could make the U.S. energy independent in 10 years. It’s just that it would be very painful. I may have to make oil prices rise to north of $500/bbl.

This morning I saw an article that laid out 5 reasons why the author felt like oil is headed toward $250/bbl:

Five Reasons Why the $700 Billion Banking Bailout Will Translate into $250 Oil

Unless I overlooked it, the author doesn’t give a timeframe, but I can see oil at $250 in less than 5 years. Here are the reasons the author provides:

First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.

Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the “Peak Oil” concept, they now accept it and only question when it will take hold.

Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there’s none left for us.

Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as “gospel” in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.

I put a lot of emphasis on the first two reasons above. As readers know from my ‘peak lite‘ arguments, I think long-term supply will lag demand growth, and it is only a matter of time before supplies start to decline. What we don’t consume in the U.S. is going to be consumed by developing 3rd world countries.

As I told someone last week at the ASPO conference, the future is uncertain. There will be Black Swan. But we have to plan based on best guesses for what lies ahead, and I am still betting on oil headed higher long-term.

Five Reasons Oil is Headed to $250

Any time I write about investing, I always stress the long-term. Short-term fluctuations don’t drive my investment decisions. I try to see 5 or 10 years into the future, and position myself accordingly. This is a big part of why I started to shift money into oil beginning in 2002; I felt like I could see the supply/demand handwriting on the wall.

My long-term strategy is why I don’t get too excited about oil shooting to $147 or correcting back to below $100. The only question for me is “Will oil be higher or lower in 5 years?” At no point since 2002 have I felt like the answer to that question is “Lower.” I can’t see any combination of alternatives making a serious dent in our consumption until prices are much higher. How much higher? Well, in the Netherlands this summer they were paying $10/gallon for gasoline. Sure, that’s mostly taxes, but consumers were still willing to pay over $400/bbl and alternatives didn’t ride in to the rescue.

Don’t get me wrong, I think alternatives can ride to the rescue – just not until much higher prices force people to cut way back on consumption. As I told someone yesterday, I could make the U.S. energy independent in 10 years. It’s just that it would be very painful. I may have to make oil prices rise to north of $500/bbl.

This morning I saw an article that laid out 5 reasons why the author felt like oil is headed toward $250/bbl:

Five Reasons Why the $700 Billion Banking Bailout Will Translate into $250 Oil

Unless I overlooked it, the author doesn’t give a timeframe, but I can see oil at $250 in less than 5 years. Here are the reasons the author provides:

First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.

Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the “Peak Oil” concept, they now accept it and only question when it will take hold.

Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there’s none left for us.

Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as “gospel” in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.

Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.

I put a lot of emphasis on the first two reasons above. As readers know from my ‘peak lite‘ arguments, I think long-term supply will lag demand growth, and it is only a matter of time before supplies start to decline. What we don’t consume in the U.S. is going to be consumed by developing 3rd world countries.

As I told someone last week at the ASPO conference, the future is uncertain. There will be Black Swan. But we have to plan based on best guesses for what lies ahead, and I am still betting on oil headed higher long-term.

More Signs of Demand Destruction

This time, the news comes from the API:

U.S. oil demand drops in first half of 2008

WASHINGTON – U.S. oil demand was significantly down for the first six months of 2008, API said today in its Monthly Statistical Report. While U.S. refiners churned out record and near-record amounts of oil products, imports – especially product imports — fell substantially.

Deliveries of all oil products – a measure of demand – fell 3.0 percent compared with the same first-half-year period in 2007, with gasoline deliveries slipping 1.7 percent. For the preceding three years, oil demand had essentially held steady.

API statistics manager Ron Planting said, “At 20.08 million barrels per day, total demand was the lowest in five years. And the decline in gasoline demand was the first significant one recorded in 17 years. Higher pump prices and a slowing economy were undoubtedly factors.”

Those are significant numbers. This should not be lost on those who think we should tap the SPR to push prices back down.

Crude Cracks $130

I am still trying to extract myself from underneath an avalanche of e-mails, but thought I would post just a bit on oil prices, which are again in record territory:

Oil passes $130 for the first time

In the past year, crude oil prices have more than doubled, pushing retail gas prices higher.

The price of a gallon of regular unleaded gasoline hit a record high for the 14th straight day, according to AAA’s Web site.

The nationwide average for a gallon of regular unleaded rose to $3.807, up from $3.80 the previous day and up 19% from year-ago levels.

Global demand has been increasing much faster than supply. In particular, demand for diesel fuel in China, India, the Middle East and South America has made it very difficult for suppliers to keep pace.

The direction of prices has not been a surprise to me, but the speed that they have climbed has been. Last summer, when oil was still bouncing in the $60′s, I said I thought it would crack $100 in 2008. It only missed one trading day by cracking that in 2007, and has been on a tear since fall. Right now prices are about a year ahead of where I had forecast them.

How high will prices go? In the long run, I can’t make a good case for any particular top. They could go much higher. In the short term, I never try to guess the direction. But I am certainly not in the $40 oil camp. Those days are history. The days of $80 oil may even be history, and if that is the case the economy will continue to be in for a rough ride.

IEA Slashes Demand Projections

Today the International Energy Agency (IEA) released their Oil Market Report. While the report is only available for subscribers for the first 2 weeks following the release, reports are already emerging on some of the contents:

Record oil prices put brake on demand growth – IEA

LONDON (Reuters) – The International Energy Agency on Tuesday sharply reduced its forecast for oil demand growth through the rest of 2007 and into 2008 saying oil’s march towards $100 was already slowing consumption.

The adviser to 26 industrialised consumer nations cut its prediction for fourth quarter demand growth by 570,000 barrels per day (bpd) and by 180,000 bpd in the first quarter of 2008.

That will cut the need for OPEC crude by up to 700,000 bpd in the fourth quarter of this year and up to 300,000 bpd in the first three months of next year, the Paris-based agency said in its monthly Oil Market Report.

“…the recent dramatic price rise is having a ‘short-term’ shock effect, at the same time as consumers appear to be adapting behaviour to deal with steady annual price increases,” the report said.

The IEA had already made deep downward revisions to its demand forecast in its October report. In total, the IEA has slashed projected fourth quarter demand growth by nearly 900,000 bpd and cut growth in the first quarter by more than 200,000 bpd.

The major significance there is that the dire warnings of OECD inventories falling to critical levels were based on the IEA’s earlier forecasts. Those projections of critically low inventories (and those projections have been wrong all year long) have helped drive oil prices higher. I haven’t seen any reports of revisions to the IEA’s inventory projections, but the slashed demand should signicantly increase future projected inventory levels. In short, the emergency that many have projected in the near term will be delayed by this latest IEA report.