Global Energy, 2014: An Inconvenient Truth -- Oil Demand In The US Grew At The Fastest Pace In The World In 2013 -- Outstripping China For The First Time Since 1999 -- Think About The Implications

I posted this earlier as part of another post but this is so important, I posted it separately, and gave it the appropriate tags. In addition, it will be linked at the sidebar at the right, not quite sure where, but it will be one of the "Big Stories."

Reuters over at Rizone is reporting:

Oil demand in the United States grew at the fastest pace in the world in 2013, outstripping China for the first time since 1999 as the globe's top economy reaped the benefits of a shale boom, oil company BP said on Monday.

In its annual review of energy statistics unveiled in Moscow, BP also raised its global oil reserves estimate by 1.1 percent after revising U.S. reserves upwards by more than a quarter.

Global natural gas reserves were cut for a second year as lower provisions for Russia and Qatar offset a significant uptick in U.S. estimates.

BP also said the United States recorded its largest-ever annual rise in oil production for a second year in a row with a 13.5 percent increase to above 10 million barrels per day (bopd).

The annual review, first published in 1951 and considered an industry benchmark, showed U.S. oil consumption in 2013 grew by 400,000 bpd to 18.9 million bpd, the sharpest gain in the world, followed by China's rise of 390,000 bpd to 10.8 million bpd.

The consumption growth was led by an expansion of the U.S. industrial sector as the world's top economy emerged from the 2008 financial crisis, BP Chief Economist Christof Ruhl said. 

The linked article goes on for three internet pages.

There are so many story lines here. But let's just go down one story line: if oil demand surges like this, one would assume the price of oil (and natural gas) would also increase (sort of "Economics 101, Supply and Demand").  If oil and natural gas got more expensive last year, and if Germany is shutting down their nuclear program (as Japan did), what do you think is the likely outcome? That brings us to the story.

The St Louis Post-Dispatch is reporting:

Coal dominated world energy markets last year by supplying the biggest share of demand since 1970, making it the fastest growing fossil fuel, according to an annual review by BP.

Consumption grew 3 percent last year, driven by coal use in developing nations, according to a statement Monday from Europe's third-largest oil company. Use of renewables such as solar and wind also reached a record, accounting for 2.7 percent of all energy demand.

The findings are another indication that consumers are prioritizing cheap fuels over efforts to rein in greenhouse gas emissions blamed for global warming. Coal is the dirtiest fossil fuel, and use of it expanded at utilities from China to Germany.

"Europe is increasing its carbon emissions because it's using too much coal because it's cheap," Royal Dutch Shell's Chief Financial Officer Simon Henry said in an interview on Bloomberg Television June 3.

Coal's share of global energy use reached 30.1 percent, just below the 32.9 percent share for crude oil, which lost market share for a 14th consecutive year. China was the world's biggest coal consumer, followed by the U.S. and India.

In China, coal accounted for 67.5 percent of the total energy demand, the lowest on record because of new measures to combat pollution. Carbon dioxide emissions from fossil fuels use grew by 4.2 percent, or 358 metric tons, the slowest in five years, the report showed.

And the article goes on and on. 

Musings On The Global Oil (And Natural Gas) Situation

Late in the evening on June 9, 2014, I was checking oil and natural gas futures. After the recent run-up in prices, I was surprised to see that WTI crude oil was holding its own, after a big day, and was even "in the green" for further gains. I was convinced that we would start see profit-taking.

To the best of my knowledge there is no impending "shooting war" in the Mideast that would result in this screen shot (the time for these futures, 23:33:34 EDT, June 9, 2014):



I never talk about where the price of oil is headed (or at least I try not to; I assume I have violated that rule on occasion); I've learned that it's impossible to predict oil prices except perhaps under extreme conditions. If Saudi Arabia were to announce a full export embargo, for example, I could safely predict the price of oil would go up.

What surprised me was that oil was holding unto its gains. According to some analyst some time ago, this is the longest period in history of sustained "high prices." I assume by "high prices" he meant greater than $90/bbl. I can't find the link for that story, and maybe there is no story; perhaps I dreamt it.

But I'm pretty sure I'm correct. This is the longest period in history where oil has held above $90/bbl for months on end. No volatility.

The price of oil is less a problem than volatility. Producers, consumers, governments can adjust to high prices; they can adjust to low prices; what is difficult is adjusting to volatility.

What interests me is the stories that come from this sustained period of high-priced oil. What follows will be true even if oil drops to new lows, back into the $60-bbl range.

For me, these are the "big stories" which I follow elsewhere.

In the "old days," there was really just one, maybe two, centers of gravity when it came to oil: OPEC, and maybe, Russia.

Today, there are four centers of gravity: OPEC, Russia, Asia, and North America. One could add Europe but the EU will be a side-story based on what happens in the other areas; one could separate the North American story into the US and Canada, and in one of the links I do just that.

I often use "tectonic plates" as a metaphor for activity in the four centers of importance in today's oil and gas industry. But "tectonic plates" suggest slow, ponderous, glacial movement.

When I saw the $104/bbl price holding for futures and then noted some stories appearing at the same time (see below) and other stories playing out since the Sochi 2014 Paralympic Winter Games, I felt that "tectonic plates" as a metaphor was inappropriate. Things are moving a lot more quickly behind the scenes in the oil and gas industry than the average person-on-the-street realizes. It's almost like a hurricane, rather than a tornado. The latter strikes fast with little warning. The former, on the other hand, build up for weeks before they arrive. It's the "calm before the storm."

The best analogy I can come up with right now for what I'm seeing in the global oil and gas industry is the "Scramble for Africa" from 1880 to 1900.

I cannot articulate well what I am thinking, so for now, the stories and the data points that intrigue me will have to stand on their own. None of the points (except my "personal observations" at the bottom, perhaps) are new or unique. They are the views and data points provided by others. So here goes, the stories behind the "calm before the storm":

• President Obama is an ideologue and cannot "relate" to the events occurring in the global oil and gas industry. It's a blind spot in his "make-up." If I'm wrong, the alternative is "scarier" and much more concerning. It is what it is; it's not a partisan statement. Remember, the analogy is the scramble for Africa, 1880 - 1900.
• The Russian-Chinese deal -- previously posted. The global power shift: Russia-China hegemony. 
• The Russian-Ukraine-American chess game -- previously posted. 
• The US-Canadian race to export oil to Asia. (An example of Obama-Reid-Schumer-Pelosi missing the big story. This is similar to the "Scramble for Africa" - 1880 - 1900.)  See below.
• How the Russian-Chinese deal benefits Japan. Japan's energy crunch. See below.
• Europe at a tipping point (one of the "big stories" tracked elsewhere).
• The recent IEA report: Saudi Arabia needs to produce at record levels to mitigate record oil prices by the end of the year (2014).
• China's insatiable appetite for oil. See below.

The Immigrant Song, Karen O with Trent Reznor  

Looking at some of the points above in more depth:

The US-Canadian race to export oil to Asia. (An example of Obama-Reid-Schumer-Pelosi missing the big story. This is similar to the "Scramble for Africa" - 1880 - 1900.). Rigzone is reporting:

Within the energy sphere, Canada and its southern neighbor are engaged in a different type of competition: the race to gain first-mover advantage for exporting crude oil to markets throughout the Atlantic and Pacific basins. According to the U.K.-based research and consulting firm GlobalData, Canada is outperforming the United States in this rivalry by advancing three critical pipeline projects.

• TransCanada's Energy East Pipeline, which would carry 1.1 million barrels per day (bpd) of crude from Alberta and Saskatchewan to refineries and terminals in Eastern Canada

• Enbridge's Northern Gateway Pipeline, a twin pipeline that would carry up to 525,000 bpd of crude oil westbound from Northern Alberta to the Pacific port of Kitimat, British Columbia, and 193,000 bpd of condensate on the eastbound leg 

• Kinder Morgan's Trans Mountain Expansion Project, which would twin an existing pipeline from the Edmonton, Alberta, area westward to Burnaby, B.C., to boost its capacity from 300,000 to 890,000 bpd.

How the Russian-Chinese deal benefits Japan. And also Japan's energy crunch. Rigzone is reporting:

The China-Russia agreement, the biggest gas deal ever, unlocks new gas supplies and could bring down gas prices across Asia, a development that would pay the biggest dividends for Japan, the world's top buyer of liquefied natural gas.

China's insatiable appetite for oil. There may be month-to-month variability, but the overall trend is up, and an increase of 11% y/y the first five months of 2014, I would think, is significant. If I read this correctly, China is importing (more than) 6 million bopd, about two-thirds the total amount the US produces on a daily basis ([less than] 9 million bopd). Numbers are rounded in the story below:

China's crude oil imports rose 9 percent in May from a year earlier to 6 million barrels a day (bopd), latest government data showed.

But imports fell 6.5 percent from a daily record high of 6.8 million logged in April, according to data released by the General Administration of Customs. Crude oil imports in January-May period went up 11 percent from the same period of 2013 to 6.25 million bpd.

China is the world's No. 2 oil consumer after the US. Earlier this year, the US Energy Information Administration (EIA) said it projects China is likely to surpass the US in net oil imports on an annual basis by 2014 as US oil production and Chinese oil demand "increase simultaneously." The Middle East remains China's largest source of crude oil imports, according to the EIA.

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 Personal Observations

I follow the oil and gas industry fairly closely. Some things jump out at me. I am unaware of President Obama being involved in any anticipatory (rather than reactive) position with regard to the global energy situation. The four centers of gravity come together in four locations: a) the Arctic; b) Russia-EU; b) Russia-China (Asia); and, North America-OPEC.

T. Boone Pickens has talked at length about the relationship between North America and OPEC, and the relative advantages North America has, so I won't go into that. Suffice it to say, there is no indication that the US government has an anticipatory stance with regard to OPEC.

The US has pretty much ceded the Arctic to the rest of the world with regard to oil and gas exploration. I have linked any number of stories along that line over the past several years. The US, compared even to Norway, appears uninterested in the Arctic when it comes to oil and gas exploration.

The US is minimally involved in the other two locations (Russia-EU and Russia-China) and, in any event, appears to be in a reactive stance, rather than an anticipatory stance. For example, I am unaware of any coherent national (US) policy to "help" China with its energy needs.   

The screen shot of oil futures with the price of WTI oil at $104/bbl doesn't really have a direct connection with any of the meandering in these notes, but the $104/bbl got me to thinking about the bigger picture.

So, when things are going pretty well in the world (i.e., no major "shooting war" in the Mideast or a major terrorist event in Saudi Arabia) oil remains at the highest price in years. It looks like WTI oil will close slightly above $104/bbl today.

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Updates

June 11, 2014: Iraq is spiraling out of control. President Obama refused to come to Maliki's aid (Maliki is the leader of Iraq, capital is Baghdad) a few days ago, and now the Iranian/Syrian Sunni insurgents have taken Mosul, Tikrit, and are "sweeping" towards Baghdad. It appears to be fait accompli that we will have a new government in Iraq by the weekend. Oil speculators are confused; afraid to go over $105.30 and yet common sense says Iraq may not be shipping much oil in the near term. IEA has asked Saudi to maximize production; OPEC refuses to increase production, coming out of their Vienna meeting last week.

Later, 10:27 CDT: OPEC signals it will NOT increase production. 

Later, 7:31 CDT: from a message board regarding the Mosul-Kurdistan pipeline --

The original Kirkuk to Ceyhan pipeline with capacity of 1.6 million bopd, the one constantly being blown up, goes right past Mosul.So good luck with that.

The new Kurdistan to Ceyhan pipeline which goes thro' Kurdistan controlled territory & then links in with the Kirkuk to Ceyhan pipeline inside Turkey should still be okay.

Maliki has threatened legal action re two shipments that have left Ceyhan that originated in Kurdistan & hasn't reached agreement with Erbil.

Baghdad itself ( & Maliki ) must now be at risk with Isis coming down from Mosul & in from Fallujah.

So entire Iraq exports of 2.6 million bopd must be questionable in medium term.

Will Iran act? Will Turkey act?

U.S. can hardly continue to arm (good )rebels in Syria when these arms are just going to end up with Al Qaeda/ISIS. For that matter do they continue to send arms into Iraq?

Later, 6:20 pm CDT: I am so cynical about the whole Mideast, I was not even aware that al Qaeda had taken back Mosul. The White House calls this serious, but that's as much as we'll hear from President Obama on this. He knew that once the US left Iraq, the country would implode, but there's no way he would go back in. On so many levels, he could never go back into Iraq. Al Qaeda knew that.

If this is accurate, that al Qaeda has taken Mosul, the capital of Kurdistan, this is bad, bad news for several oil companies operating in northern Iraq; bad news for Iraq; and, bad news for consumers. Iraq was already limping with regard to oil exports; Kurdistan was actually somewhat successful. But if this news story is accurate, this is bad, bad news. It will be interesting to see how this affects oil futures. If there is little change, it tells me the movers and shakers (and the speculators) had already baked "the loss of Iraqi oil" into their equations.

Wow! Talk About A Wake-Up Call; Britain And France Will Run Out Of Fossil Fuel In Five Years Unless They Frack; Knight To F3

Updates

December 25, 2014: Russia vs the US, the oil story and chess. 

December 23, 2014: Russia, four ex-Soviet nations sign economic pact.

September 1, 2014: Putin orders construction of that huge natural gas pipeline between Russia and China to commence. This order comes right at the height of the Ukraine-Russia-EU energy story. 

August 7, 2014: Putin bans agricultural imports from EU, US and other countries that placed sanctions on Russia. Specifically:

The Prime Minister Dmitry Medvedev said at a televised cabinet meeting yesterday that Russia’s retaliatory ban covers all imports of meat, fish, milk and milk products, fruit and vegetables from the United States, the European Union, Australia, Canada and Norway. It will last for one year.

Checkmate.

July 30, 2014: it's Putin's move. The US/EU announced new sanctions. Morgan Stanley analysts think Putin will cut off natural gas to Europe.


July 23, 2014: sounds like the Europeans are cheating; Putin is on to them; willing to "watch and wait"; not aggravate things at the moment. It's possible Putin's threats are making Europe think twice about doing this; caught at "cheating," the Europeans are reducing the amount of natural gas they are providing the Ukraine.

July 13, 2014: Mr Putin and his chess games -- the Ukraine, the Mideast, and, now, Central America. 

July 8, 2014: if you scroll down at this post, one can see how Putin continues to win this chess match. 

July 3, 2014: ever since I started comparing global politics between Vladimir Putin and Barack Obama to a chess game (now two chess games: the Ukraine AND Iraq), readers have been sending me links to show how "right" I was. This quote was attributed to Mr Putin; whether it is accurate or not, here it is:

Negotiating with Obama is like playing chess with a pigeon .. the pigeon knocks over all the pieces, craps on the board, and then struts around like it won the game." -- Vladimir Putin, undated, unsourced.

Later, 8:24 p.m. central time: readers may have noticed I've reported that a fair number of energy companies have recently declared increased dividends or dividends for the first time in quite some years. It was just something I noticed; no statistical analysis to see if accurate. Interestingly, the lead story in this week's issue of Bloomberg Businessweek, "Choosing Profits Over Productivity," which according to the writer/editor: "Bottom line -- productivity growth is stalling while companies spend their $2 trillion cash hoard on buybacks and dividends." Wow: saying exactly what I thought I was seeing. It's a nice two-page article. The authors spend a fair amount of time discussing the obstacles or the headwinds businesses have had to contend with the past several years ... and yet, the authors do not mention the #1 headwind: ObamaCare. The 800-pound gorilla.

Later, 6:09 p.m. central time: I inferred from a reader's note (that I received in response to the original post below), that Mr Obama walks on water, and that I should stick to science. To those who think I should stick to science I refer you to the cover of the most prestigious general "science" magazine out there, The National Geogrpahic. Ground to torch, the Statue of Liberty stands 305 feet, one inch high. I am not aware of any "scientist" who argues that the water level will rise as high as depicted on that cover.
 

Original Post

Presidents come and go. It's hard to believe we won't have a more pro-growth president following the current debacle five years from now. Even Hillary with half-a-cerebrum could do better than what we've been through the past six years. [Don't take this out of context: perhaps President Obama has been the best president this country has ever had; I don't know; only history will tell. All I know is he does not appear to be a "pro-growth" president, and some folks would consider that "good." So this is not a rant about President Obama. The comments have to do with the future of energy despite who is in office.] 

Five years from now, North America should be the energy center of the universe. The Verge is reporting that France and Great Britain will both run out of fossil fuel within the next five years. Other sources suggest that Norway has already started seeing its production fall. 

Talk about a wake-up call from the linked article (that article loads very, very slowly for me; it can also be found at The Independent):

The UK is set to run out of its oil, coal, and gas supplies in a little over five years, a new report had claimed.

The research from the Global Sustainability Institute has said that other European countries are facing similar shortages and that many nations will become entirely dependent on energy imports in the next few years.

The UK has 5.2 years of oil remaining, 4.5 years of coal and three years of gas before completely running out of fossil fuels, says the institute, which is based at Anglia Ruskin University.

France is reportedly even worse off, with less than a year’s worth of fossil fuels in reserve, while Italy has less than a year of gas and coal and a single year of oil.

"The EU is becoming ever more reliant on our resource-rich neighbours such as Russia and Norway, and this trend will only continue unless decisive action is taken,” said Dr Aled Jones, the director of the institute.

"It is vital that those shaping Europe's future political agenda understand our existing economic fragility.”

It's very possible (hopefully) we will look back on the two lost decades (2000 - 2020), as the period when the US oil and gas industry was getting its ducks in order, despite all the obstacles Washington (DC) put in front of the industry during the terrorist-decade (2000 - 2008) and the anti-US-growth decade (2008 - 2016). By getting its ducks in order, I mean building the infrastructure needed to maximize its massive energy resources.

Back to that article about Europe running out of fuel. If one was running out of energy resources, wouldn't a responsible government want to maximize other alternatives? This speaks volumes about the "practicality" of renewable energy:

The Government has recently announced cuts in its subsidies for large-scale solar farms from next April, two years before they were projected to end, and the Conservatives have said they will not subsidise new onshore wind farms if they win the 2015 general election.

If the London Array (off-shore wind) is such a success, why don't the Brits want to replicate it? 

It speaks volumes about the success of the Bakken laboratory:

Ministers are instead hoping that a combination of shale gas - extracted by fracking - and new oil finds in the North Sea will be able to plug the coming deficit.

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A Note to the Granddaughters

This may be one of the funniest things to have occurred to me personally with regard to the blog.

As regular readers know, my life revolves around our two granddaughters. My commitment to them as a grandfather/caretaker/nanny/mentor/whatever is 24/7.

Because of the older one, I am re-learning physics, math, biology (particularly Linnaeus classification) and astronomy (to some extent).

Because of the younger one, I am learning to play the guitar and enjoy (sort of) soccer.

And, because of both of them, but mostly due to the younger one I am learning to play chess again.

The other day I used chess as an analogy, writing:

The bigger story, of course, is that the Crimean was part of a huge chess game.

The chess game began with Putin's brilliant handling of the Russian winter Olympics, an opening "knight" move to "F3." The Crimean was a pawn. Eastern Ukraine was perhaps another knight. Latvia is a pawn en passant. Losing Germany as an ally on sanctions, that's worth at least a loss of a knight for the US.

The Chinese-Russian natural gas pipeline was at least a loss of a rook for the United States, possibly even worth the queen. The loss of Russian rocket engines was a bishop loss for Russia, but that was more than made up for by the Chinese-Russian hegemony, worthy of castling early. 

I really didn't know much about chess strategy, just the basic rules on how to play the game.

Fast forward one week. Today I am in the Southlake, TX, community library. I have just finished re-reading Mike Reynolds' biography of Ernest Hemingway. I re-stock it and then look for another book to read. On "display" by the librarian I pick up Nate Silver's The Signal and the Noise: Why So Many Predictions Fail -- But Some Don't.

Until I picked up the book I knew nothing about Nate Silver. According to the book jacket, "Nate Silver is a statistician, writer, and founder of the New York Times political blog FiveThirtyEight.com. Silver also developed PECOTA, a system for forecasting baseball performance that was bought by Baseball Prospectus. He was named one of the world's 100 Most Influential People by Time magazine."

In chapter 9, Silver talks about statistics, probability, and the "rage against machines." The chapter deals with computers programmed to play chess. He spends several pages on IBM's Deep Blue computer taking on world chess champion Garry Kasparov, the top-rated chess player in the world from 1986 until his retirement in 2005. Or more precisely, Garry Kasparov challenging IBM's Deep Blue.

Now, remember, my notes written a couple of days ago: "The chess game began with Putin's brilliant handling of the Russian winter Olympics, an opening "knight" move to "F3."

Here on page 270 of Silver's book, the first time I had ever opened this book:

Kasparov's goal, therefore, in his first game of his six-game match against Deep Blue in 1997, was to take the program out of database-land and make it fly blind again. the opening move he played was fairly common; he moved his knight to the square of the board the players know as 'f3.' 

Wow. I did not know that this particular opening move "was fairly common." The only reason I used it as an example was because it derived from the three lessons I learned from reading about chess while teaching our younger granddaughter (three lessons she understands well):

• control the four center spaces of the board
• get one's knights into action quickly
• castle early

But I have to say, I nearly fell off my chair in the library when I came across that passage in Silver's book.

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By the way, reading Nate Silver's book has a much more practical benefit for me. I often remind folks that the Million Dollar Way blog is not an investment site. No one should make any investment decisions based on anything they read in the blog. For me personally, I never planned on using the blog to help me invest. But somewhere along the line two things evolved: first, it became clear that to understand the Bakken, one had to follow the money; and, second, to follow the money, meant blogging and reading about the Bakken day in and day out.

To insure this does not become an investment site, I will end it there.