First OPEC wanted to be compensated if climate change legislation costs them revenue, and now this:
You only get a small preview of the following story, but I found the bit that is accessible to be pretty humorous:
OPEC’S producers need greater certainty over long-term oil demand if they are to justify upstream investments to bring new production capacity on stream, says the group’s secretary-general. In an interview with Petroleum Economist, Abdalla El-Badri reiterated Opec’s message that greater clarity about demand is necessary if the world expects Opec’s exporters to continue investing in new output capacity.
Uncertainty over demand yields a startling gap in the group’s 10-year outlook. Opec says demand for its crude in 2020 could reach 37m barrels a day (b/d) – up from 28.8m b/d now – or remain almost flat, reaching just 29m b/d.
It’s a dilemma, because the additional investment needed to meet the higher figure amounts to $250bn, says El-Badri. “We could use that money somewhere else; in our infrastructure or for the welfare of our people.
Sorry, but that’s just not the way the world works. All businesses would like some certainty about demand. If GM had some certainty about demand, they would never have had to declare bankruptcy. They could have just built the cars that would be demanded. But the best you can do is try to estimate where demand will end up, and make your decisions accordingly.
However, I will give some free advice. I don’t believe the world will be able to build out enough crude oil capacity to keep up with demand. (Even if demand remains flat, new capacity has to come online to compensate for depleting fields). I don’t believe biofuels can scale up enough to displace more than a small fraction of our oil consumption. I believe demand from China and India will continue to grow. I believe that oil production will soon peak (if it hasn’t already). And I believe that a lot of projects have already been delayed or canceled, increasing the likelihood of a return of supply/demand imbalances within a few years. If my musings are correct, upward pressure will continue to be the trend in oil prices, and countries that have export capacity will make a lot of money.
So nobody is going to give you certainty on demand (in fact, most people are likely to be appalled at the idea), but if it were me I would make the investments in capacity. Even though many countries will continue to attempt to migrate away from oil, demand for oil will remain strong for many years to come.
As we continue to develop biomass as a renewable source of energy, it is important to keep the cost of energy in mind, because this has a very strong influence on the choices governments and individuals will make. I sometimes hear people ask “Why are we still using dirty coal?” You will see why in this post.
Last year I saw a presentation that projected very strong growth in wood pellet shipments from Canada and the U.S. into Europe. My first thought was “That doesn’t sound very efficient. Why don’t we just use those here in North America?”
It didn’t take very long for me to find out the answer to that. It is because wood pellets are much more expensive than natural gas in North America. On top of that it takes more effort to use wood for energy than it does natural gas. That combination means that wood has a tough time competing with natural gas in North America.
When I was looking into that issue, I compiled a list of the price for various energy types on an energy equivalent basis. The price is as current as possible unless noted. I have converted everything into $/million BTU (MMBTU), and the sources are listed below.
My preference is to use EIA data over NYMEX data because the former is an archived, fixed number. I have included energy for heating and for various transportation options. For comparison I also included the cost of electricity and the cost of the ethanol subsidy/MMBTU of ethanol produced.
Current Energy Prices per Million BTU
Powder River Basin Coal – $0.56
Northern Appalachia Coal – $2.08
Natural gas – $5.67
Ethanol subsidy – $5.92
Petroleum – $13.56
Propane – $13.92
#2 Heating Oil – $15.33
Jet fuel – $16.01
Diesel – $16.21
Gasoline – $18.16
Wood pellets – $18.57
Ethanol – $24.74
Electricity – $34.03
It isn’t difficult then to see why wood pellets have a difficult market in the U.S. For people with access to natural gas, they are going to prefer the lower price and convenience of natural gas over wood. For Europe, their natural gas supplies aren’t nearly as secure, so they have more incentive to favor wood as an option.
The cost of the ethanol subsidy is interesting. We pay more for the ethanol subsidy than natural gas costs. However, if you consider that we are paying a subsidy on a per gallon basis – and a large fraction of that gallon of ethanol is fossil fuel-derived, the subsidy for the renewable component is really high.
For instance, if we consider a generous energy return on ethanol of 1.5 BTUs out per BTU in, that means the renewable component per gallon is only 1/3rd of a gallon. (An energy return of 1.5 indicates that it took 1 BTU of fossil fuel to produce 1.5 BTU of ethanol; hence the renewable component in that case is 1/3rd). That means that the subsidy on simply the renewable component is actually three times as high – $17.76/MMBTU. Bear in mind that this is only the subsidy; the consumer then has to pay $24.74/MMBTU for the ethanol itself.
Sources for Data
Petroleum – $13.56 (EIA World Average Price for 1/08/2010)
Northern Appalachia Coal – $2.08 (EIA Average Weekly Spot for 1/08/10)
Powder River Basin Coal – $0.56 (EIA Average Weekly Spot for 1/08/10)
Propane – $13.92 (EIA Mont Belvieu, TX Spot Price for 1/12/2010)
Natural gas – $5.67 (NYMEX contract for February 2010)
#2 Heating Oil – $15.33 (EIA New York Harbor Price for 1/12/2010)
Gasoline – $18.16 (EIA New York Harbor Price for 1/12/2010)
Diesel – $16.21 (EIA #2 Low Sulfur New York Harbor for 1/08/2010)
Jet fuel – (EIA New York Harbor for 1/12/2010)
Ethanol – $24.74 (NYMEX Spot for February 2010)
Wood pellets – $18.57 (Typical Wood Pellet Price for 1/12/2010)
Electricity – $34.03 (EIA Average Retail Price to Consumers for 2009)
Petroleum – 138,000 BTU/gal
Gasoline – 115,000 BTU/gal
Diesel – 131,000 BTU/gal
Ethanol – 76,000 BTU/gal
Heating oil 138,000 BTU/gal
Jet fuel – 135,000 BTU/gal
Propane – 91,500 BTU/gal
Northern Appalachia Coal – 13,000 BTU/lb
Powder River Basin Coal – 8,800 BTU/lb
Wood pellets – 7,000 BTU/lb
Electricity – 3,412 BTU/kWh
In this, my last posting of the decade, I thought I would write something profound. Then I realized I don’t really have anything profound to say today, so at the risk of violating Point 9 below, I thought I would summarize some of the things I have learned since starting this blog.
I am closing in on the 4th anniversary of R-Squared. This essay is my 895th. Based on recent trends, 2010 should bring the one millionth viewer here as well as the one thousandth essay.
I had no high hopes for the blog when I started it. As I told a friend at the time, I looked at it as more like a place to archive some of the research I was doing. My thinking was that there are a million blogs out there, and it would be hard to differentiate mine from the others.
On the other hand, there weren’t a lot of energy-themed blogs covering the specific issues I was looking at. I knew because I was trying to do research on some topics, and ran into a wall of misinformation. So, I would write the stories, mainly for my own reference, until I ran out of things to write about. But on the topic of energy, I would soon find that it is hard to run out of things to write about.
I remember in the beginning that I would get 1 or 2 viewers a day. That changed pretty quickly after Andrew Leonard at Salon linked to one of my ethanol essays. From then on, the number of viewers increased. Shortly after that, one of my essays ended up in the #1 slot on the first page of Reddit. That was only a few months in, and 5,000 viewers linked in from Reddit in a single day.
Of course I have learned a lot since starting the blog. My breadth of knowledge across the energy sector is much greater now than in the beginning. Even so, energy is a huge field, and if I tried to cover all of it the coverage would necessarily be superficial. This is one reason you don’t see more stories here on wind and solar; they are not my core area of expertise so they don’t get a great deal of coverage.
In no particular order, here are some of the other lessons I have learned since starting the blog.
1. Choose my words carefully
I remember this lesson well. The blog readership had grown quite a bit, but I did not really appreciate the diversity of the audience. At that time I was still prone to write blistering, no holds barred critiques of energy companies making outrageous claims. I had written a bit about Coskata, and I felt like their claims were dubious. But then I finally looked a bit deeper, and I wrote Coskata: Dead Man Walking.
Of course I was being flippant with the title, but hey, it’s only my blog. It’s not like I am writing a news story. People know it is my opinion, and thus I can say pretty much what I think. Right?
Then the floodgates opened. I got contacted by the media. I got contacted by investors. I got contacted by the DOE. I even got contacted by Coskata. With the exception of the last one, the others all wanted to know “Are their claims really invalid?” Of course Coskata wanted to let me know that their claims were valid.
But the episode was a turning point in the way I write. I can remember at the time doing a media interview on the story, thinking “Holy Cow! I have to be more careful with my phrasing in the future. That was unnecessarily antagonistic and there are apparently a lot of people reading this stuff.”
Since then, I have tried to exercise more caution. I still maintain that there is no way that Coskata can make ethanol for $1/gallon, but I have to keep in mind that if I write an overly critical story of a company it could influence some investors which could influence the fortunes of the company. (A long shot, but something I have to keep in mind). Thus, I am potentially impacting people’s livelihood with what I write, and as such I have a duty to be very sure about my statements before I make them. No more flippancy or unnecessary antagonism.
2. Don’t make it personal
A friend once said that it is OK to disagree, but you don’t have to be disagreeable. I try to keep this in mind as I debate and engage people. Check the personal stuff and the ad homs at the door. Let’s debate the data, and if the data dictate that my position should move, then it shall move.
3. Not everyone cares about the data
I have learned a lot about how people behave. I have learned that not everyone is interested in objectivity; some are only interested in a very specific viewpoint. In these cases, inconvenient data are either to be rejected outright (That’s absurd!) or discredited (the guy who did the research has a cousin who works for ExxonMobil; thus the study is no good).
Dealing with people like this is never a fair fight, because I am interested in looking at their data. They are only interested in looking at mine if it supports their point of view. Otherwise, they go into the mode of defense attorney attempting to exonerate their client.
4. I love to write
That should be obvious, given that for the past 4 years I have averaged 4.5 essays per week. People often ask “Where do you find the time?” I find the time the same place people find the time to watch TV or play video games (and I do some of that as well, but not so much TV). The fact is that I can type out what’s in my head very quickly. My routine is that I wake up early, read through the latest energy headlines, and write if I see something that I want to comment on. I spend less than an hour on the average essay, so it is not a major time commitment each week. Answering e-mails is a different story, which is why my e-mail address disappeared from the front page.
5. I don’t write well to deadlines
I am prolific when the subject is wide open and there is no schedule involved. When I am writing an article for a website or a publisher, and there is a specific deadline involved, I find that it is much harder to get motivated. There is a different dynamic involved in waking up, seeing a story of interest, and making a post on it than there is if the subject is defined and I have a week to fill in the details.
I have been asked twice about my interest in writing a book, but it would take me 10 times as long to do a book as it would to do enough essays to fill a book. So right now I do a book chapter now and then (I have three that are either published or in process, with another two due next year) and in the back of my mind I hope eventually to pull those chapters together as the basis of a book. But to just sit down and start writing a book? Not at this point in my life.
6. Trying to predict which essays will get a lot of hits is futile
I found out early on that I could spend 3 hours on an essay, pepper it with references and links, and yet another that I spent 10 minutes on may get 5 times as many hits. The essay that ended up on the front page of Reddit was a puzzle to me. I had under 20 essays under my belt at that time, and in fact it was well after I published it that it claimed the top spot on Reddit. But I thought I had written essays that would have been much more deserving. To this day I am puzzled as to why that one made it to the top, and not some others that I think are much better. Here it is: Fuel Efficiency and Lessons from Europe. (Another one claimed the top spot a year or so later, but I don’t even remember which one it was).
In fact, probably the most read essay in the history of this blog is one that I wrote just a couple of months ago. I buried it on the 2nd page of my blog and locked the comments on it. It was off-topic and I didn’t want regular readers to be distracted by it, but I wanted to document something. It was again picked up by Reddit and a number of media outlets, and was read almost 20,000 times in under two weeks. It hasn’t fallen out of the Top 10 since I published it. For the curious, here is that one: Exposing a Two-Bit Scammer. I must warn you that it has zero to do with energy, and should only be read if you are bored and have nothing else to do.
7. Keep an open mind
I pride myself on my objectivity. I consider it a critical aspect of my job and my writing. But I have to constantly guard against slipping into a bunker with a particular ideology, defending against all outsiders. I recognized early on in my blog that most of my essays were anti-ethanol, and that I was starting to come across as an ethanol foe. But that is not a universal truth. I am against aspects of our ethanol policy, and in speaking out against those I sometimes appear to be anti-ethanol without qualification.
But that certainly isn’t the case. I see ethanol as I see other fuels. There are trade-offs. There are vested interests. Some will gain and others will lose. But with this, as with any position, the question I try to keep in mind is “What would cause you to shift your viewpoint?” If the answer to that is “Nothing” then you are truly in the realm of dogma and there is no point discussing data. As I stated earlier, it wouldn’t be a fair debate. But I try to always have an answer to that question in mind. For ethanol, I attempted to answer that question very early on: Improving the Prospects for Grain Ethanol
8. Sometimes you are going to make enemies
I don’t like to make enemies, but when you are speaking out against vested interests you are going to make them. Reasonable people sometimes disagree, but vested interests aren’t necessarily reasonable and their disagreements can quickly become personal. A corn farmer in Iowa isn’t necessarily interested in data that argues against more corn production. (In fact, I got a death ‘wish’ from a corn farmer once; one of maybe half a dozen threats/wishes I have received).
So if you have convictions, even if they are data-based, you are going to make some enemies if you speak out on them. This is especially true when dealing with vested interests. It is simply impossible to please everyone.
9. Don’t force content
While I have written a lot of essays over the past four years, I have had some periods of time in which I didn’t really have anything topical to put out there for a week or more. That has led me at times to post guest essays or 3rd party content that really weren’t up to the standards I have set for this blog. Worse, I have been occasionally guilty of that myself by quickly throwing something together and publishing it. I can avoid this by refusing to listen to the inner voice that says “It’s been a week. You really need to publish something.” If I maintain discipline, then I will only post when there is something worth posting, even if that means I don’t put anything up for a month.
10. The spam bots are getting much better
It won’t be long before I have to start locking comments on the essays that scroll off of the first page. The spam bots – those that write something like “Great blog” with a link to some off-topic business – have gotten much better at breaking through the word verification than they were even a year ago. I get an e-mail of every single comment posted, so I am able to catch and delete all spam, but it is taking more of my time every day.
11. I learn a lot from the comments
The blog would not have continued had it not been for so much good feedback that I received. I find myself learning an awful lot from reading comments. Often, it is through the comments that I first learn of a new development or a new research paper. The comments also frequently force me to reevaluate my positions, which is something I value greatly.
12. Self-link to my previous essays
Some people may have noticed that I almost always link each essay back to a previous essay. That isn’t so much about self-promotion as it is about maintaining a connection when others pick up and republish an essay. I have given permission to many other websites to republish content as long as there is a note that indicates the origin of the essay. Still, some websites will grab essays and republish content as their own. By putting links in, readers can be linked back here, and since I have a StatCounter that indicates where visitors came from, I can spot the websites that are republishing content as their own.
13. There is no money in this
If I was trying to make a living at this, I would have to move to one of those countries where you can live on $2 a day. Of course I am not doing this for money, nor have I ever tried to write in a way that would maximize ad revenue. If I was trying to write for a living, I would have picked a different topic, like Hollywood Gossip. Of course then I would have to start watching TV, and who has time for that?
On the other hand, there have been a lot of opportunities that have arisen as a result of the blog. I have had numerous job offers/inquiries since I started this, I have been asked to write for books and magazines, and I have given media interviews and made presentations. This increases the audience that I can reach.
14. People’s interest in energy goes up and down with the price of oil
It is really hard to get people engaged on energy unless prices are climbing. To this day, the query that most frequently brings readers in for the first time is “Why are oil/gas prices rising?” If prices aren’t rising, people don’t care and there isn’t much interest in energy policy. But we have lived through interesting times since I started the blog; prices steadily climbing for the most part. When they level off, the number of readers falls.
So that’s a bit of what I have learned, and hopefully those lessons have improved the quality of the essays over the past four years. May we continue to live during interesting times, so there will be lots of new stories to report on.
Happy New Year to everyone.
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).
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.
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 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.”
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.
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 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.
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:
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
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.
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
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.]
One of the themes I have been hitting during my recent presentations concerns the oil price risk hanging over our heads. My hypothesis goes something like this. The days of huge supply excesses in the oil production world are over. Those 5 million barrel per day supply cushions of 10 years ago kept oil prices low, and fairly stable. As the excesses shrank we began to see increasing volatility and prices steadily climbing. Higher oil prices have historically caused recessions. We are currently in a recession, albeit one in which high oil prices weren’t the primary cause. (More on that at the end).
But, oil supplies were already tight prior to the recession. The recession has lowered demand, and at the moment we find that we again have a fair excess of oil production capacity. As global economies strengthen, that increases the demand for oil. One of the things I have been pointing out in my presentations is that U.S. oil demand dropped by 1.2 million bpd over the past four years, but demand in India and China increased by 1.9 million bpd over that time period.
Therefore, it won’t take long for the capacity cushion to shrink and for oil prices to spike up again, putting us back at risk for recession. This was the basis for my essay The Long Recession – and I think it helps explain why oil is back up to $80. This is going to make for a long recession, and one in which the attempts to recover will trigger the higher oil prices that tend to bring on recession in the first place. It is a merry-go-round that we need to get off of, but it won’t be easy.
CNN has a story out today that covers this theme:
NEW YORK (Fortune) — Are cash-strapped American consumers on for another date with energy price misery?
The U.S. economy remains weak and one in six Americans can’t find enough work. Yet oil prices have risen steadily this year. A barrel of crude costs $79 and change, more than double its price at the end of 2008.
That could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.
I think “complicate recovery” is putting it mildly. We have to recognize the economic danger posed by being so dependent upon something that has the potential to swiftly bring the economy to its knees – and that is also in high demand by countries like India and China.
The story also points to the role oil prices played in bringing on the recession:
And though it’s futile to single out any one trigger for the recession that started at the end of 2007, the downturn didn’t start in earnest until consumers’ energy budgets breached the 6% mark in November that year.
As energy prices soared and incomes came under pressure, Americans first stopped buying pickup trucks and then deserted the local car dealer altogether. Car sales plunged in the spring of 2008 before falling off a cliff with the collapse of Lehman Brothers that September.
“The price of oil played a bigger factor in the recession than people seem to be remembering,” Hamilton said.
I would argue that the U.S. would have been pushed into recession eventually even without the subprime mortgage crisis. There are also a number of people who would argue that high oil prices led directly to the recession; that it was oil prices stretching family budgets which led to people not being able to pay their mortgages. Regardless of which theory is true, it is a historical fact that spiking oil prices have caused economic slowdowns, and over the past year oil prices have doubled. It is tough to see an easy way out.
In closing, I am still traveling for a couple more days (writing this from a small library in Oklahoma), and as I mentioned in the previous post I am about to miss my wife’s birthday for the 4th year in a row. So I want to wish her a Happy Birthday tomorrow, and at least this year I will be home only one day late. Plus, I will be arriving in Hawaii with our two Miniature Schnauzers that we had to leave behind when we moved to Hawaii. She doesn’t feel too bad about me missing her birthday, because the reason is that I had to take a detour to Texas to pick up the dogs. So, she is going to be reunited with “the pups” after three months apart (this is a result of Hawaii’s tight restrictions on importing pets) – and I think she feels that’s a great birthday present. At least I hope she does, because I didn’t get her anything else. Now that I think about it, I should go shopping…
I am back in Hawaii, and over the next couple of days I will climb out from under an avalanche of correspondence. I have a couple of essays to get out, including an interview that I conducted with the CEO from an algae company. What he said may surprise you.
Until then, the latest energy-related story from Money Morning. 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. I don’t endorse any specific stocks mentioned in the following story; these stories are meant to spur discussion.
A Money Morning Interview: The Future of Energy
Renowned Oil Expert Dr. Kent Moors Details Shortages of Oil, the Impact of Higher Prices, the Promise of New Technologies and the Opportunities For Investors Dr. Kent Moors is one of the world’s foremost experts on oil, energy policy, finance, risk management and new technologies. Moors advises the leaders of six oil-producing countries, including the United States, as well as global corporations and banks operating in 25 countries.
Moors is the founder and director of the Energy Policy Research Group, which conducts analyses and makes recommendations on a range of energy-related issues. He is also the president of ASIDA Inc., a worldwide advisor on the oil-and-natural-gas markets.
In an interview with Money Morning Executive Editor William Patalon III this week, Dr. Moors detailed the top current energy challenges in the global economy, and also provided investors with a look at some of the looming new technologies, as well as a future in which China is a dominant global energy player.
Some of these issues are already at work. Although oil prices remain well below the all-time record of $147 a barrel set in July 2008, crude prices have been on the march of late. Just yesterday (Wednesday), in fact, supply concerns pushed oil futures up above $81 a barrel, their highest level in more than a year.
“If you think the run up to July 2008 was a wild ride, you haven’t seen anything yet,” Dr. Moors told Money Morning. “In the next five years, investors who focus on medium- to small-sized producers and oil-field-service companies having a well-developed specialty niche will outperform the overall energy sector.”
Money Morning (Q): In an earlier discussion, you said that the successful energy investor of the future wouldn’t be a person who just goes out and invests in ExxonMobil Corp. (NYSE: XOM). Can you explain?
Dr. Kent Moors: We are entering a period of rising prices. There is still some play left in the large verticals (vertically integrated oil companies, or VIOCs) such as ExxonMobil, but the primary profits will be made with smaller, leaner exploration-and-production (E&P) outfits, field-service companies and specialized producers (unconventional gas producers – shale gas, coal bed methane, tight gas, hydrates – heavy oil and biodiesel).
(MM): How will investors have to play this future? What types of companies should they be looking for, and where should they look?
Moors: The market rapidly approaching will be more volatile with valuation often more difficult to determine than in the past, even with prices increasing. How much of the increases result from actual product margins and how much results from oil becoming a financial asset rather than just a commodity is a major concern. It requires some careful homework. The types of categories mentioned above – smaller producers, new developments in field services and technology (especially those providing ways to decrease wellhead and operational costs, increase productivity, use associated gas, treat and utilize produced water, increase efficiency per barrel … there is a long list here) as well as the specialized producers and providers of their technical needs are the main targets.
(MM): When we look at the U.S. economy, you said that investors would be stunned to discover how much of our oil is produced by small players. In that discussion, in fact, you even described the type of firm that could be the “savior” of the U.S. energy sector, and perhaps even the economy. Could you take a moment to describe that situation and explain what that means for the economy?
Moors: The United States remains one of the top five producers of crude and will shortly ramp up production of natural gas (once the current glut has moved through the system). Sixty percent of crude produced in the U.S. market is at stripper wells providing less than 10 barrels of crude a day, but more than 20 barrels of water, a major byproduct. As America enters an accelerating field maturity curve (and an intensifying decline in well debit – well production), the efficiency of production declines. Therein lies a significant area for innovation and leaner companies. And that spells greater profitability at lower entry prices. Some offshore and Alaskan National Wildlife Refuge (ANWR) production will be done at scale, but that is not where the future of U.S. production will be. It will be the result of greater profitability at existing depleting wells with the new technology rolled out (on the oil side) and unconventional gas production.
(MM): Let’s take a look at the global markets, too. China’s global shopping spree has been well chronicled. As China locks up suppliers and supplies of oil and natural gas, what are the chances there could end up being what’s almost a two-tiered market, where China has access to oil and natural gas at lower prices levels, creating a shortage of non-captive supplies and leading to Western countries having to pay much higher prices?
Moors: Price rises for Westerners will occur anyway, and not just because of China (where a rising energy bubble resulting from the recent acquisitions is a concern). The competition for available energy sources will usually result in those regions prepared to pay more, increasing the overall aggregate price for most others. China, India, a resurgent East Asia, Japan and even regions such as West Africa will occupy important positions moving forward in this regard. Also, rising demand will center in places other than OECD countries. The new oil market emerging can hardly discount the developed countries, but the primary demand spikes are going to come from elsewhere.
(MM): After some significant turmoil in recent years, you said that Russia is finally opening up to foreign investment. Will that last, and what effect will that have on global energy prices?
Moors: To offset a more rapidly declining traditional production base (primarily Western Siberia), Russia must move north of the Arctic Circle, into Eastern Siberia and out on the continental shelf. These moves are technologically sensitive and very expensive. Moscow needs the outside investment and that will remain. However, projects must be carefully structured. Foreigners cannot own 50% of “strategic fields” under new laws or anything on the shelf. This means watch out for the smaller, focused operators and oilfield service companies. They will include companies currently trading on the Alternative Investment Market (AIM) in London: The AIM and London Stock Exchange (LSE) are the sources of the new external investment phase in Russia.
(MM): From a global perspective, which markets show promise? And which ones – either because of overly restrictive investment policies, or because of the risk of nationalization – are markets to be avoided?
Moors: Many markets show promise or telegraph restraint. Let’s look at some of the more noticeably promising markets, organized by energy category:
- Conventional Oil: Sub-Saharan Africa, Brazil, Kazakhstan, Russian Eastern Siberian and Far East smaller fields.
- Conventional Natural Gas: Turkmenistan (if recent government overtures to outside investment remain genuine), Uzbekistan, Northwestern Australia (region of the Gorgon project) and New Guinea.
- Unconventional Oil: Tatarstan (Russia) for bitumen and heavy oil, Alberta for oil sands (assuming an average and multi-year sustainable crude price of $72 [USD] a barrel or above).
- Unconventional Gas: The United States for shale (especially Marcellus Shale) and coal bed methane (Powder River Basin, Wyoming, also basin into Montana – if that state reduces regulations), Poland, Turkey and Germany for shale, south central Russia and Ukraine for coal bed methane. If Baghdad and Erbil can finalize central Iraqi and regional Kurdish oil legislation – and if security is maintained – Iraq will become a major play in both oil and gas.
- TO BE AVOIDED: Iran (sanctions and buyback contract frustrations), Mexico (collapsing infrastructure and nationalization), Venezuela (significant technical shortcomings, concerns over productivity assessments, and absence of Western operators).
(MM): If an investor were to divide the energy market into short/intermediate/and long-term segments, what will be the dominant energy plays (oil, natural gas, solar, coal-bed methane, for example) in each of those three time segments? What time periods would you tack onto the short-term, intermediate-term, and long-term segments? And which energy plays will be the real winners?
Moors: To make this easier to see, let’s divide this into short-term, intermediate and long-term segments and look at the key players, issues and technologies in each category.
- Short-Term (five years out): Here we’ll see an increasing efficiency at existing oil wells; Marcellus Shale natural gas; an extension of large fields into known deeper production layers – for example, BP-led (NYSE ADR: BP) multinational plays such as the Azeri-Chyrag-Guneshli and Shah Deniz deposits offshore Azerbaijan. Other developments to watch are the huge Chevron-led (NYSE: CVX) Tengiz field in Western Kazakhstan, initiatives in the central Gulf of Mexico and all satellite fields operated by other companies.
- Intermediate-Term (five to 15 years out): All U.S. and Canadian shale plays, Wyoming, Montana, New Mexico and Russian coal bed methane, selected wind power Western U.S. and Baltic Sea region (Denmark, Germany, Poland).
- Long-Term (20 years or more): All alternative and renewable energy (by this point, crude oil will be too volatile with supply problems and natural gas from whatever source will be the main power source both for conventional applications and for new technologies – fuel cells will obtain most of their price-sensitive hydrogen from natural gas).
Moors: Here’s the bottom line. Looking forward, successful energy investors will be those who: (1) weigh volatility as well as opportunities; (2) understand the rapidly changing supply/demand balance; (3) hedge within a focused time-frame; (4) watch the development of new technology to improve production, processing or transport; and (5) have a flexible approach to the market.
There is a good overview in today’s Guardian regarding the status of affairs with respect to electricity storage technologies:
So with grid parity now looming, finding ways to store millions of watts of excess electricity for times when the wind doesn’t blow and the sun doesn’t shine is the new Holy Grail. And there are signs that this goal — the day when large-scale energy storage becomes practical and cost-effective — might be within reach, as well. Some technologies that can store sizeable amounts of intermittent power are already deployed. Others, including at least a few with great promise, lie somewhere over the technological horizon.
I have used the “Holy Grail” term several times to describe cost effective storage of electricity. I have also given “energy storage” as an answer when people ask what we should be focusing more attention on. While this article is perhaps overly optimistic, it provides a good overview of what people are working on.
I also read a good article last night on renewable energy in India:
Despite the deepening energy crisis, renewable energy, predominantly wind and biomass, make up 3 percent of India’s total electricity production. Solar energy is not even a fraction of that, though India receives abundant sunshine throughout the year.
But India hopes to move from near-zero to 20,000 megawatts of solar electricity by 2020, as part of the National Action Plan on Climate Change. Announced in June 2008, the plan is a structured response to combat global warming and part of a proposal India intends to pitch at a climate change summit in Copenhagen this December.
If there is one thing the world desperately needs, it is for India and China to embrace renewable energy as their economies grow. If they do not, I think their growth is going to encounter fierce economic resistance as their growing energy needs start to put serious pressure on oil prices.
Sometimes people ask me what I think will happen as a result of peak oil. Well, it depends. We could see alternatives – natural gas, ethanol, GTL, CTL, etc. – fill the gap of falling oil supplies for a while. It just depends on how quickly production falls. But if the alternatives are not up to the task, then I think what we will see – borrowing terminology from The Long Emergency– is The Long Recession. Here’s how it would work.
As economies heat up, demand for oil increases. This puts upward pressure on oil prices, which can ultimately cause a recession such as the one we are in now. Historically, spiking oil prices tend to consume disposable income and lead to recessions. Jeff Rubin, whose new book I recently reviewed, has claimed that four of the past five recessions were caused by spiking oil prices.
In normal cycles, oil companies build up capacity when oil prices are high. A recession caused by high oil prices, combined with overcapacity built up during the price rise, can keep oil prices at bay for a long time. But what if oil capacity can’t be overbuilt, because oil production has peaked? In this situation, oil prices will start to recover just as soon as the economy starts to come out of recession. This may in turn “restall” the economy, leading to a long recession that just repeats the cycle every time the economy begins to recover.
It is hard to say that we are at that point. However, oil prices have recovered quite a bit of lost ground, and have now crossed $70/bbl:
At the end of May CNNMoney.com ran a story asking if $60 oil will kill any economic recovery. ‘No,” most analysts said – consumers could shoulder $60 crude, and analysts didn’t see prices going much higher.
Now oil is touching $70 a barrel. Goldman Sachs recently said it sees crude at $85 by the year’s end. With the economy still on life support, oil is drifting dangerously close to being the wet blanket at the recovery’s party.
Hmm. Sounds like what could be waiting on the other side of this recession is…a recession.
There are alternatives that start to become economical with oil at $70 or more. Oil sands, for one. Natural gas vehicles also start to look pretty good at those oil prices. Even GTL, CTL, and BTL stand a chance of being economical if oil prices hang around at lofty levels. But companies – especially oil companies – are pretty risk averse when it comes to predicting oil prices. I doubt any U.S. oil companies are basing future economics on the expectation of > $70 oil. If they were, you would see far greater investments into unconventional energy sources.
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