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The Looming Spike in Crude Prices

Lots of very crazy stuff going on behind the scenes that’s been keeping me very distracted, and writing to a minimum. Fortunately, Money Morning sent me a very timely essay this morning on crude prices. This one takes aim at the API. While I have a cordial relationship with the API, like Kent Moors who wrote the article below I think their crude production projects are way too optimistic. Of course I say the same thing about projections from the EIA, IEA, and pretty much any organization that predicts that we are going to have a major increase in production from today’s rates. My position for the past 5 years has been that the top is pretty close to 90 million barrels/day, give or take a few million. Some of these organizations are predicting that we will be able to produce over 100 million bpd, and I just don’t see it.

Anyway, as I previously explained topical Money Morning content will be featured here from time to time. As always, normal caveats apply: I am not an investment advisor; these stories are meant to spur discussion.
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Profit From the Looming Spike in Crude Prices That the U.S. Oil Lobby Doesn’t See Coming

By Kent Moors, Ph.D. Contributing Editor Money Morning

John Felmy has been the chief economist of the American Petroleum Institute (API) for years. He’s well respected. And I appreciate his experience. But the two of us disagree more often these days.

We most recently locked horns at Malone University in Canton, Ohio, last week, where we were debating the future of oil. (Actually, when the invitation was made, I was supposed to debate Sarah Palin. But she pulled out to go on the road and pitch a book she didn’t write.)

Nonetheless, something disturbing emerged from the debate.

I still find John a pleasant enough fellow, but the mantra coming from the API, the mouthpiece of the oil industry, is wearing thin. They want us to believe that the oil market is still fine, still humming along, still providing the best energy value. You’ve heard the argument before: Gasoline is cheaper than milk or bottled water.

This time, John tried the latest API version of this sleight of hand: Whatever price you need to pay, oil is still cheap, still plentiful, still the energy of choice.

Sorry folks, the API just doesn’t get it. And what it refuses to get is becoming one of the most important factors investors in the energy sector will need to watch – carefully. This is all about supply and demand. But it’s not the traditional lecture from Econ 101.

This one is going to roll out differently.

Over the next several months, oil will begin losing its balance. As it falls off the wagon, risk will escalate. And that will require greater due diligence by investors. But as the risk increases, so will the number of opportunities. I’ll show you how to profit from them as they surface.

But first, here’s the problem with the API’s approach.

“Suspect” Figures Are Way Off

As John grudgingly admitted in our exchange, the API’s figures are becoming “suspect.” I have a less charitable view. (Unlike John, I don’t work for them.)

The API figures are way off.

They still portray a view of demand (low) and supply (high) that will not continue to square with reality. We have had lower demand for months only because of the financial crisis and the credit crunch. But this has had nothing to do with the oil market as such.

Others are catching on.

The Paris-based International Energy Agency (IEA), for example, has already admitted its supply estimates were too optimistic while its view of demand was too conservative. The IEA revisions have been paralleled in similar moves by the London Centre for Global Energy Studies (CGES), Russia’s Institute for Energy Strategy (IES), and even Washington’s usually impervious Energy Information Administration (EIA).

There’s a reason for this.

Worldwide oil demand, while sluggish, is nonetheless returning more quickly than anticipated. In addition to the usual suspects – China, India, a resurgence in the Far East – OPEC countries are retaining more of their own production to diversify their economies. Russia is facing rising domestic needs at the same time it tries to avoid a significant decline in crude production. Mexico is witnessing a meltdown in its oil sector while its domestic needs also rise. And new major markets are exploding in places like West Africa and South America.

Notice this is not happening in the United States or Europe. These countries are no longer the driving forces in the oil market. The most developed markets are not calling the shots, despite still being over-weighted in the data collected. The IEA finally got that. So did CGES, IES, and even the EIA.

But not the API.

Indeed, the paid spokesperson for the American oil industry continues to see crude oil as the main option. True, it gives lip service these days to alternative and renewable energy. Moreover, given its position as the in-house spokesman for the hydrocarbon sector as a whole, it is also praising the virtues of natural gas as the immediate choice when we transit from crude oil.

Unfortunately, the API still fails to provide an accurate picture. Perhaps in the final analysis, this happens because its clients are the oil producers.

Oil’s (Profitable) Reality

We currently have about 86 million barrels a day in worldwide crude oil demand. That still represents a figure below pre-crisis levels. However, all of the organizations mentioned above (with the exception of the API) are now estimating a rise to around 87.5 million over the next year, with increases accelerating thereafter.

Current global supply, on the other hand, will max out at 91-92 million barrels. That gives us a small cushion – just a few years – before the real fireworks start. Period.

Because new volume coming on line will barely replace declining production from older fields, we have little prospect of avoiding insufficient supply producing a spike in crude oil prices. This is not necessarily a bad development from the investor’s perspective, since a volatile market will provide profit opportunities, especially if the direction in price remains sustainable over any period of time.

The impact on other market sectors, of course, will be less positive.

The key here is to recognize the major benchmarks and triggers, along with early changes in what they tell us. These will not all be moving in the same direction as the unwinding ratchets into high gear. But we will be able to identify when they are changing and, more importantly, how to profit from them.

I’ll be discussing the strategy as it unfolds over the next several months.

I’ll show you, for example, how to spot a real oil-demand rise in the American market before it becomes apparent to everybody else. There are several approaches I will suggest as the market opens up. The best place to start is watching the leading economic indicators.

Actually, six of the 11 stats provided by the Department of Commerce are dependent upon, or reflect, changes in productivity and industrial needs. These are all also energy intensive. That means a rise in energy demand will precede the actual rise in the indicators. This is one of the early triggering mechanisms I use in my analysis and for making my estimates.

I’ll flag them for you as they emerge. And I’ll lay out how they impact the U.S. energy sector and related investments. There are quite different ways of early detection for other global markets, where the demand will be moving in more quickly.

Calls on investment alternatives will be very sensitive to changes in indicators and triggers. That means in energy, we need to stick to the trends. So stay tuned. The recommendations will follow in short order.

Just don’t expect to gain much traction from the API!

[Editor’s Note: Dr. Kent Moors, now a regular contributor to Money Morning, is the executive managing partner of Risk Management Associates International LLP, a full-service global management consulting and executive training firm. He is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment, as well as new techniques in energy risk management.

Dr. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states and the premiers of two Canadian provinces, a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured television and radio commentator in North America, Europe and Russia. He has appeared on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV, and regularly on Fox Business Network.

Moors next columns will be written from Moscow and London, where he’ll be talking to officials, company executives, traders and bankers. Russia is about to signal a major change in oil and gas development strategy, while recent events in London are signaling a new oil pricing approach.]

December 4, 2009 Posted by | American Petroleum Institute, api, investing, investment, Money Morning, oil prices | 15 Comments

The API on Cap and Trade

Yesterday the American Petroleum Institute conducted a blogger’s conference call to talk about various energy issues that they are focused on. I used to regularly attend these calls, but things have been quite busy and it has been a while since I participated. But I thought it would be worthwhile to check in and find out which issues they are currently occupied with. I asked one question on cap and trade during the call (see below).

The API listed three key areas that they are focused on. These are the Waxman-Markey climate bill, which they think will cost jobs (particularly in the energy industry), domestic access to petroleum resources, and taxation of the oil and gas industry. Participating from the API were:

MODERATOR: Jane Van Ryan, API

SPEAKERS:

Jack Gerard, President and CEO, API
John Felmy, Chief Economist, API
Doug Morris, API
Kyle Isakower, API

The bloggers on the call included:

The audio and transcript can be found here. In his opening statement, Jack Gerard happened to mention recent testimony of Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the US Treasury, in which he justified higher taxes on the oil industry by suggesting that current tax policies have led to overproduction by the industry. That is simply astonishing. Yes, it must be overproduction that has caused our oil imports to increase year after year to the point that we import 60% of what we use. One wonders what the import level will reach once this domestic “overproduction” is reined in through punitive taxes. For a bit more on Krueger’s testimony, see:

Administration attempts to justify tax proposals surprise Gerard

Alan B. Krueger, assistant US Treasury secretary for economic policy, mentioned that the administration was looking at other industries’ tax breaks during a Sept. 10 hearing by the Senate Finance Committee’s Energy, Natural Resources, and Infrastructure Subcommittee on the White House’s Fiscal 2010 oil and gas tax proposals.

When a subcommittee member, Jim Bunning (R-Ky.), asked him if the administration was currently singling out the oil and gas industry as it seeks tax incentive repeals, however, the US Department of the Treasury official replied, “That is correct.”

Gerard said he continues to be amazed by Obama administration statements that oil and gas tax incentives should be repealed to prevent overproduction of domestic resources. “The Treasury Department’s Green Book says there’s too much oil and gas production in the United States. We think that’s laughable. We think there needs to be some serious dialogue about what these proposals mean and about ways to get back to producing more oil and gas,” he said.

Also see Geoff Styles’ analysis of the issue:

Overproducing US Oil?

Back to the call, I get concerned about proposals in which the price tag is vaguely defined. I would much rather see a direct tax on gasoline in which the impact can be modeled, over a new system whose overall impact on prices is uncertain. The latter is a big economic risk to me. So I asked a question about cap and trade, with Geoff Styles following-up.

11:16 MS. VAN RYAN: Another question? Robert, I know that you sent one to me by e-mail. Would you like to pose that question yourself?

11:24 MR. RAPIER: Yeah, I’ll do that. Yeah, the question was, I understand the concern about the cap-and-trade legislation; I have similar concerns. I am wondering if you have an alternative proposal; if there is any kind of legislation for cap-and-trade that you could get behind that achieves the same goals?

11:46 MR. GERARD: We haven’t. There has not been a proposal out there yet, Robert, that we have gotten behind. We think now is the time for a reset. There was a lot of focus on this early on in the Waxman-Markey bill. There was a lot of effort gone into it and it just came out in the wrong place. So what we have been attempting to do over the past few months is to point out the significant flaws in that legislation with the hope and expectation that we can help educate policymakers and the public.

And what we found is that when you begin to educate, not only does it resonate but it is clearly understood. The House exercise was focused primarily on the utility area or consumers’ bills, industrial bills that we often think of that you get at home to pay for your heating, your cooling, et cetera. But it almost totally left out the fuels question. And that is why 44 percent of all the emissions – or I should say refineries – will be held responsible for 44 percent of all the emission and yet given only 2.25 percent of allowances to transition us to a carbon-constrained world. So the net effect of that is – and I am oversimplifying this now – is that you’ve shifted the cost onto those who use fuels.

And that is why you see the farm bureau, you see the truckers, you see small business and others. When they began to see through the dust of the activity in the House, they say, well, what happened is we are looking at our utility bills and the Congress made an effort to transition us over time to a carbon-constrained world and they tried to provide some mitigating factors – in this case, allowances – to do that, but on the fuel side, we got totally forgotten. So anybody who drives a pickup truck, a car, rides the bus, the train, flies on an airplane is going to have an almost immediate impact as a result of Waxman-Markey.

And so in educating on that front, I believe we now have their attention that we have got to look at that question. And we internally, and as an industry, are developing further thoughts and ideas, if you will, as to how best address the fuel question and how it fits into the broader framework of a carbon-constrained world.

14:13 MR. STYLES: Jack, this is Geoff Styles. Could I follow up on that?

14:16 MR. GERARD: Please.

14:17 MR. STYLES: Because I certainly share your concern about the disproportionate way that Waxman-Markey doles out the free emissions allowances. In conversations with some of the folks who have been supporting the bill, I get a sense that there is a belief out there that, to some extent, maybe to a significant extent, they feel that the costs that would be imposed on the refining sector would somehow be absorbed by the refining sector and not actually passed on to consumers. Has API done anything looking at, you know, to what degree, any degree, of cost absorption by the refining sector as opposed to simply shifting the market pricing points, and in effect, pushing it on to consumers would take place?

15:11 MR. GERARD: Let me answer that generally. And I will turn to our chief economist, John Felmy, afterwards to see if he can add anything to it. My simple response would be unless you can repeal the laws of economics and supply and demand, that is the only conditions under which that thought would work because it just doesn’t make any sense.

What we are talking about here is significant costs. We are not talking about nuances around the edge. And just as I mentioned earlier, some of our analysis shows you would drive gasoline over $4 a gallon in the current environment. And so, you know, potential job loss of 2 million jobs. We are not talking a penny or two here. We are talking about quarters and dollars.

And how they could come to that conclusion might give them some political cover in trying to justify what they have asked for in the bill. But I don’t see how it makes any economic sense and frankly, it is unrealistic. Now, let me turn to an economist to give you a real answer. How is that?

16:14 JOHN FELMY: Well, if I could just add, I mean, that is absolutely right. There are two key factors. First of all, the emissions that the refiners themselves produce – they are competing on a world scale with international refiners. And we had commissioned EnSys to take a look at that. And it clearly showed that it would be a severe and negative implication for refining capacity in the U.S. because of an inability to be able to compete.

But more importantly on the consumption side and a sense of being responsible for the emissions from the tailpipes of your users, I think it is helpful to look at the current refining situation right now. In the second quarter of this year, almost every refiner lost money. And in the fourth quarter of last year, basically, there was a complete inability to pass along any cost changes.

And so with that kind of market conditions, primarily driven by international competition with a lot of, for example, gasoline on world markets from places like Europe and so on, I fail to understand how there is that ability to be able, from an economic sense, to have that happen. Analytically, you have got a weak gasoline market. You have got a lot of supply on world markets. And that competitive aspect, by most analysts, is expected to remain.

17:33 MR. STYLES: So in effect then, John, what you are saying, I think, is what I concluded a long time ago, which is if refineries are expected to absorb this, they will absorb it by going out of business.

17:44 MR. FELMY: Exactly. If you are already losing money and you raise your costs and you have no ability to address that, the margins already were low when they were positive, and when they are negative, there is nothing to give away.

17:58 MR. STYLES: Thank you.

18:00 MR. FELMY: And with, you know – we have got three broad classes of refiners in this country. You have got the big ones, which are about 50 percent; you have got about 25 percent, which are the big independent ones that are not integrated; and then a lot of very small refiners that would really take a beating in that environment.

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Following that exchange, I got a bit distracted with juggling cats and never had a chance to ask another. But if you are interested in the rest of the discussion, you can access the transcript and audio at the link.

September 19, 2009 Posted by | American Petroleum Institute, api, carbon tax, energy policy, gas tax, politics, refining | 28 Comments

Bloggers Go to Billings

I should have Part 2 of the series of answering readers’ questions posted by tomorrow, but until then I was just sent the following link, which was of great personal interest to me:

A Green Refinery?

The gist is that last year the American Petroleum Institute flew a group of bloggers up to the ConocoPhillips refinery in Billings, Montana where I used to work to give them a perspective of life in a refinery. A video diary of the trip was recently posted to the link above. An excerpt from the link:

The refinery has twice been awarded EnergyStar designation by the EPA for its comparatively efficient production processes. It also established a Citizen’s Advisory Council to maintain an open dialogue between the community and ConocoPhillips. This council has been instrumental in tracking the plant’s social, economic, and environmental performance.

It was kind of funny to see my old managers there lecturing on how a refinery works, and what makes the Billings Refinery unique. (Yes, Tim Seidel looks unusually young to be a manager in a refinery, but he is very talented).

Here were some of the essays that bloggers wrote following the trip:

How Much at What Pressure and Temperature?

Semi-coherent and random thoughts about the Billings trip

Refined Refinery? ConocoPhillips in Billings, MT

I do have one comment on some of the write-ups I have seen. There seems to be some misinformation that the refinery was either built for, or relies upon the Alberta tar sands for feedstock. First, that certainly wasn’t why the refinery was built, as it was there long before tar sands became an industry. Second, unless things have changed in the 2.5 years since I left, the refinery actually utilizes little or no syncrude from tar sands. It is a refinery designed for heavy, sour oil, and as such is not ideal for the syncrude coming out of the tar sands.

Anyway, just thought this might be of some interest. More answers to readers’ questions tomorrow.

August 3, 2009 Posted by | American Petroleum Institute, api, Billings, ConocoPhillips, oil refineries, refining | 9 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 62 Comments

The 2009 EIA Energy Conference: Day 2

Energy and the Media

This was the panel I had been asked to participate in. My fellow panelists were Steven Mufson (one of my favorite mainstream energy reporters), from the Washington Post; Eric Pooley from Harvard, (the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future.

I can only imagine that a number of people looked at the lineup, looked at my inclusion, and thought “What’s that guy doing up there?” So here’s the background on that. When I was working at the ConocoPhillips Refinery in Billings, Montana, we followed the weekly release of the EIA’s Weekly Petroleum Status Report very closely. We included this information in a weekly supply/demand report, and it helped us to make decisions on how to run the refinery for the upcoming week.

When I started my blog, I began to follow and report on the weekly inventory release, which happens on Wednesday mornings and is followed in the afternoon by This Week in Petroleum. Kyle Saunders (Professor Goose) at The Oil Drum liked the weekly reports and asked me to bring them over to The Oil Drum. This all helped drive more traffic to the EIA website, and helped more people come to appreciate the value of the EIA data.

Doug MacIntyre, at that time the primary author of This Week In Petroleum, started commenting occasionally on my blog, and was quick to answer any questions that readers had. Over time I corresponded with several people at the EIA, and they invited me up to the conference last year. The timing didn’t work out last year as I was in the Netherlands, but this year’s conference was doable. So that’s how I ended up on a panel with the mainstream media.

The panel consisted of use all sitting around a table and taking questions from John, and eventually the audience. I will mostly report on what I said, because it was pretty difficult to take notes while sitting around the table.

The first question was on the price run-up last summer, and whether the media coverage was adequate. We all had somewhat different answers on this, but I took the opportunity to point out that the weekly inventory data can be an important predictor of prices. The plunging gasoline inventory data was the basis of my predictions for $3 and $4 gasoline in the Spring of 2007 and 2008 respectively (which we did in fact see). The other thing I pointed out about this issue is that Google searches on “rising oil/gas prices” probably drive more first-time traffic to my blog than anything else. (Searches for the “water car” are also quite popular).

Next John asked about phony, or false balance in reporting. Before the panel, I had asked readers at my blog and at The Oil Drum for suggestions on topics to cover, and false balance was mentioned by several readers. An example one reader gave was “Scientists report that the earth is round – Flat Earth Institute objects…” So how much credibility do you afford different sides of the debate?

The others on the panel agreed that this was a problem. I made two observations. One, it isn’t always easy to figure out which side is the Flat Earth Institute. I spend a lot of time trying to figure that out at times, especially over newly announced technologies. Second, the good reporters do a lot of research when they are reporting on a story so they can determine who is credible. I noted that Steve Mufson had interviewed me by phone in 2005, and all that came from that hour-long interview was a partial quote in the story. At the time I was annoyed, but later on I came to understand that Mufson was just doing a lot of homework to get the story. Most of his questions were designed to figure out if I knew what I was talking about. The people you have to watch are the ones who call for just a quote.

As an example of false balance, I talked about Brazilian ethanol. Dan Rather and Frank Sesno have both been guilty on their Brazilian ethanol reporting. In hindsight, perhaps their reporting wasn’t false balance so much as completely unbalanced, and lacking any semblance of critical reporting. They both essentially reported the Brazilian ethanol story as “They did it. We can be just like them.” I went on to explain a bit more about the truth of Brazil’s energy independence miracle, which I will update in an upcoming essay (but is also covered in my ASPO presentation from last September (Biofuels: Facts and Fallacies).

There was more discussion about scale (e.g., biofuel versus petroleum usage) and the role bloggers are playing now with respect to reporting news (some specialist bloggers can provide a technical analysis that the mainstream media may lack; on the other hand they don’t always write to journalistic standards). I know I am forgetting some topics, but ultimately John started to take questions.

There were some good questions, but also some instances where the questioner simply wanted to make a point. Morgan Downey asked what energy books I liked. I told him that I was about 250 pages into his book, Oil 101, and that it was a fantastic book. I also mentioned Twilight in the Desert as an influential book on me. I noted that while I had some issues with Twilight, I thought it did a great job of driving home the importance of Saudi Arabia in the world oil picture, and just how important it is that we understand what’s going on there. Finally, I mentioned Gusher of Lies as a book I had really enjoyed.

I was asked about peak oil and the notion that we are running out of oil. I took the opportunity to clarify that peak oil does not mean we are running out of oil – but the media often misconstrues the issue in this manner. I said that we would still have oil in 100 years. Peak oil means that we can’t get it out of the ground fast enough to meet demand, and that if the production peak is near that we are facing some difficult years. (Other than this question and my answer, there was scarce mention of peak oil during the conference).

A representative from (I believe) the California Independent Petroleum Association got up and made a statement that he felt that despite the important role the industry plays, they are being demonized and singled out for punitive taxes. I responded that I could empathize; that one of my greatest concerns is that we will discourage domestic oil and gas production, and then biofuels fail to deliver per expectations. In that case I think we become even more dependent upon OPEC.

Fellow panelist Eric Pooley disagreed and said we need even stronger incentives for moving away from oil. That really misses the point I was making, though. You can have the strongest incentives in the world, but they can’t assure that technology breakthroughs will occur. So while you are promoting one industry at the expense of another, very successful industry that plays a critical role in the world, what is the contingency plan if the incentives don’t pay off?

I was asked about how I come up with ideas for what to write. I said that I browse the news headlines on energy every morning, and that I have Google news alerts on topics like “energy”, “oil prices”, and “peak oil.” If something strikes me as particularly interesting – or particularly wrong – then I may write something about it.

After the panel, a number of people came up and introduced themselves. Some thanked me for speaking up on behalf of the oil and gas industry. One audience member asked me why I don’t write more about “the global warming scam.” As I said to him “I am not touching that with a 10-foot pole.” He asked why, and I said 1). I am not an expert; 2). Discussions over the issue always seem to degenerate into name-calling. I will repeat my position on this. Coming from a science background, I have a healthy respect for scientific consensus in areas where I don’t have specific expertise. On the other hand, the issue has become so polarized that people who do try to discuss the science are frequently shouted down and called names. I don’t endorse those sorts of tactics, no matter how correct you think you might be.

Investing in Oil and Natural Gas – Opportunities and Barriers

Once again, there were two sessions going on simultaneously that I wanted to see. I had to miss Greenhouse Gas Emissions: What’s Next? But I have been a big fan of Deutsche Bank‘s Paul Sankey for several years, and I wasn’t about to miss his panel. Sankey has testified before Congress several times on the oil and gas markets, and I often feel like he is the only one there who knows what he is talking about. (I formerly summarized one of his appearances in Gouging is an Idiotic Explanation). Joining Sankey on the panel were Susan Farrell of PFC Energy, John Felmy of the American Petroleum Institute, and Michelle Foss of the University of Texas. The moderator was Bruce Bawks of the EIA.

The panel agreed that $50 was about the average break even price for oil production today, suggesting that prices are unlikely to fall below that level for long. Farrell commented that worldwide expenditures on exploration and production amounted to $500 billion in 2008. She also noted that oil companies have been unable to arrest the decline rate; that it is in fact increasing. I believe it was also Farrell who suggested that in 2010 the haves would acquire more of the ‘have-nots.’ Someone on the panel stated that the global supply crunch still exists.

I think it was Felmy who said that even if we make a large scale move to hybrids or electric vehicles, 50% of the world’s lithium reserves are in Bolivia. So we may end up trading Chavez for Evo Morales. I don’t know; I think I would make that trade.

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn’t seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but “2010 could be a bloodbath.” He also said that the overall policy imperative of the new administration seems to be “anything but oil”, but he believes that “attacking the oil and gas industry will be incredibly harmful to the U.S. economy.”

Other Sankey zingers:

“Alaska would rate as one of the ‘countries’ most hostile to the oil industry.”

“I am not sure there is any equity in any bank in the U.S.”

“If we stopped producing gold tomorrow, we have 100 years of supply in inventory. If we stopped producing oil tomorrow, we have 55 days in inventory.”

Finally, someone on the panel (I think it was Sankey) recommended the book Oil on the Brain as providing great insight into the industry. The author, Lisa Margonelli, had a pretty average view of the industry until she delved deeply into the supply chain, traveling to Iran, Nigeria, Chad, and Venezuela. I have not read the book, but will put it on my reading list.

Thus ends my recollections of the conference. As I said in the previous entry, this is not so much a detailed account of everything as it is just my own observations and things that stuck with me as interesting, odd, etc. If you spot something that you think is in error, please let me know. For me, this was an interesting experience, and one that I was glad to be a part of. In conclusion, I want to thank the good people at the EIA for inviting me.

Previous Entries

Energy Secretary Steven Chu’s comments

The 2009 EIA Energy Conference: Day 1

April 14, 2009 Posted by | American Petroleum Institute, api, ConocoPhillips, COP, EIA, Energy Information Administration, Paul Sankey, Peak Oil, twip | 37 Comments

The Art of Spinning

As the previous post indicated, we in the U.S. have a pretty low energy IQ. One of the reasons is that energy stories are often reported in a very biased or uninformed manner, which tends to distort public viewpoints. For instance, you may think those evil oil companies are wrecking the world. You are entitled to your opinion, and admittedly the oil industry has done plenty to help forge those sorts of views.

However, in the U.S. we take an especially negative view of the oil industry relative to the rest of the world. Why? Odds are that your opinion has been shaped by stories like the examples in this essay. Make no mistake: Your views are carefully nurtured and cultured by various groups with agendas, often by publishing stories full of misinformation. (Full disclosure: I am attempting to influence your viewpoint here, but I am going to do so by pointing out shenanigans).

Here is a perfect example of a story in which words and examples were carefully chosen to convey a very specific (negative) viewpoint:

Big oil companies, little investment in renewable energy

The Center for American Progress released a new report analyzing 2008 oil company profits and lack of investment in renewable energy, even while the companies spend millions of dollars on ad campaigns touting their emphasis on renewable energy.

Note the wording. There was a “lack of investment” in renewable energy, while they spent “millions of dollars” on ad campaigns. The problem with that line – as you will see – is that the “lack of investment” is in the billions, which dwarfs the millions spent on the ad campaigns. But I suppose “billions spent on renewable energy and millions spent on ad campaigns” doesn’t convey the desired negative impression as does “4% spent on renewable energy and millions on ad campaigns.” The first phrase would likely elicit a response of “Uh, OK.” The second one on the other hand? “Why that’s outrageous! Those misers!

These kinds of stories also inevitably fail to note that the ‘miserly’ oil companies paid several hundred billion dollars in taxes as a result of those profits (if the stories mention taxes at all, it’s that the oil companies aren’t paying their ‘fair share’). According to the Tax Foundation, oil companies have paid out some $2.2 trillion in taxes over the past 25 years – far more than they earned over that time period. But such a misleading picture tends to get painted, that many may think this MoveOn.org petition is rational:

Stop subsidies for Big Oil

Think oil companies should pay their fair share of taxes? So does President Obama. In his budget, the President has proposed cutting billions of dollars in special subsidies and tax loopholes for oil and gas companies.

Just what is a fair share? Will it only be a fair share when oil companies are funding the entire U.S. government? But back to the initial article:

It should come as no surprise that last year’s record high oil prices also led to near record profits for big oil companies.

No, we were bombarded with headlines about it all the time. It should come as no surprise at all. So someone should tell this guy, who thinks it is a secret:

Obama braces for big oil backlash

Little known fact: While most every other industry was falling to pieces last year, the oil industry posted record profits. ExxonMobil alone made $45 billion. So Obama, in his attempt to bolster the sinking U.S. economy, is likely not feeling too much sympathy for the industry as he goes after the clearly unnecessary tax credits the industry currently enjoys.

Another example of a highly misleading article (which actually led me to the MoveOn.org petition). Important to note once again that while other industries were falling to pieces and requiring multi-billion dollar bailouts, the oil industry was making big profits and paying big taxes; taxes in part which enabled those bailouts. But let’s continue to dissect the initial article:

Despite their soaring earnings, the big five companies were very stingy with investments in renewable and low-carbon energy technologies and fuels that would reduce oil dependence.

Media tracking group TNS Media Intelligence reported that $52.5 million was spent in the first quarter of 2008 along by the oil industry on greenwashing advertisements that boast about investments in wind and solar power or efficiency.

In fact, a CAP analysis of their investments reveals that the big five oil companies invested just an average of 4 percent of their total 2008 profits in renewable and alternative energy ventures.

So, let’s have fun with math. According to the story, 4 percent of total 2008 profits was spent on renewable and alternative energy. That amounts to $4 billion, which the writer considers “very stingy.” $52.5 million spent on advertising – which is only 0.0525% of 2008 profits – amounts to a “smokescreen PR campaign.” Just once I would like to see one of these articles stick in a line like “In fairness, spending on their tax bills amounted to 250% of total 2008 profits.”

What planet do these people live on? Oh, right. The planet where oil companies are run by psychotic madmen and profits go to a select few executives and insiders who conspire in smoke-filled rooms. The planet where novices ‘know’ that the industry should invest their profits into ventures that aren’t their core business, and which would likely cause their profits to vanish (potentially leading to a bailout scenario!) These people live in a cartoon world, but the problem is that most of the population lives there.

Voters have been conditioned to hate Big Oil, as Robert Bryce points out in:

Exxon, Big Oil Profits Evil Only Until You Weigh Their Tax Bills

Bryce notes:

While it’s unlikely that the general public’s attitude toward Big Oil will ever be changed, the public should recognize that Exxon’s profits have come along with an enormous tax bill and that those tax payments are helping governments all over the world stay solvent. According to the company’s income statement, the amount of taxes it paid in 2008 was 2.5 times as much as its net profit.

In 2008, Exxon’s tax bill averaged about $318 million per day. And it paid those taxes at the very same time that the whiz kids on Wall Street, the geniuses at AIG, and the mavens at Freddie Mac and Fannie Mae, were begging Uncle Sam for multibillion-dollar life preservers in order to prevent financial chaos. Exxon made huge profits—and paid record taxes—at the very same time that the U.S. financial system was undergoing near-fatal convulsions brought about by excessive speculation, uncontained greed, and a basic failure to provide goods and services needed by the overall economy. How many Americans really need credit default swaps or collateralized debt obligations? Now compare that number with the tens of millions of Americans who absolutely must have gasoline every day.

What about the original article at the Center for American Progress (CAP)? Funny story on CAP. I was invited to D.C. a few years ago for an energy conference, and I happened to be acquainted with the Director of Environmental Policy at CAP (which is a liberal think tank). I was invited to drop by and talk to CAP about the oil industry. Even though I expected a hostile audience, I was looking forward to it, because I thought I might be able to address some gross misconceptions. But at the last moment, my company decided that it wasn’t a good idea for me to make the trip as oil prices were at all time highs and they were worried that I might find myself in an awkward situation with the media. But, back to the original CAP article:

Big Oil Misers

That certainly looks like a balanced title from an organization that describes itself as “non-partisan.” The strategy in the article is the same as the earlier article: Use a percentage to downplay the multi-billion dollar investments in renewable energy, and then quote the advertising money in “millions” to make it appear that more was spent on advertising than on renewable energy. But why must a truly non-partisan organization spin like this? Shouldn’t a balanced article mention the monumental tax bill that has been used in part to bail out other industries?

Worse, there are blatant falsehoods in the article itself. After noting that the American Petroleum Institute claimed that “most people support putting more of America’s oil and natural gas to work”, the CAP article claims:

And API’s assertion that “most people” support more oil and gas drilling is misleading at best. An NBC/Wall Street Journal poll asked “When it comes to addressing our energy problems, which one of the following do you think should receive the most emphasis?” (italics used for emphasis). Six of 10 respondents favored “developing alternative energy sources.”

Misleading at best? Hmm. Let’s have a look at the poll, shall we? On Page 26, we see Question 35:

I’m going to read you several steps that could be taken to ease America’s energy problems. For each one, tell me whether you think this is a step in the right direction, a step in the wrong direction, or if you do not have an opinion either way. And do you think this will accomplish a great deal or just a little in dealing with America’s energy needs?

How did people answer? While 92% felt that developing alternative energy sources would either accomplish a great deal or at least a little, 63% said the same about expanding areas for drilling for oil off the coast of the United States. Where I come from, 63% is “most people” and there is nothing misleading about the API making that claim. It is quite disingenuous, though, for CAP to suggest that API’s statement was misleading. CAP is either spinning or they didn’t read the survey very carefully. They have interpreted the question “Do you support this?” – which is the question API commented upon – as “Do you support this as your number 1 priority?” The ‘misleading at best’ charge aptly applies to CAP in this case.

I wish there wasn’t such an antagonistic relationship between the oil industry and Democrats. There is too much at stake. Historically, Republicans are more supportive of the oil industry, and in turn the oil industry overwhelmingly supports Republican candidates. (Or it may be the other way around; the oil industry supports Republicans who in turn support the industry). On the other hand Democrats (except for those in oil-producing areas) are generally hostile to the oil industry, which ensures that not much money from the oil industry will go to support the Democratic party (although Diane Feinstein has reportedly received $100,000 from the oil industry in the past decade).

My view that Big Oil and Democrats should find common ground has nothing to do with wanting to make nice with a new administration. My views are based on the belief that any intermediate success at achieving some level of energy independence must involve a large contribution from oil and gas. I think it goes without saying that oil and gas provide the overwhelming majority of our transportation fuel, and that they are forecast to provide the overwhelming majority for decades to come.

The problem is of course that some naively think they can marginalize the oil industry with punitive taxes, and alternatives will step up and fill the void. (To be clear, I also don’t subscribe to Newt Gingrich’s viewpoint that encouraging the development of shale oil will lead to energy independence). What will happen in reality is that punitive measures will discourage domestic production, which will quicken the pace of shifting our supply to imports. It is ironic that Steven Chu doesn’t seem to feel the need to work with our domestic oil industry, but warns OPEC not to cut production, and then is pleased when they don’t. I believe the blind spot in the present administration over the need to support our domestic producers will simply mean that future energy secretaries are even more beholden to OPEC.

This might change if we could have a more balanced discussion on our energy policy. However, I am keeping expectations pretty low. I have learned to do this when the topic is energy.

April 5, 2009 Posted by | American Petroleum Institute, api, energy iq, energy policy, ExxonMobil, oil companies, politics, Steven Chu | 94 Comments

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.

July 19, 2008 Posted by | American Petroleum Institute, api, gasoline demand, oil demand | 21 Comments