Back To The Future -- September 17, 2015

I remember the North Dakota oil bust in the early 1980s but was not aware just how bad things were back then.

The graph below shows the amount of oil the US imported from Saudi Arabia back in the 1980s. When one looks at those numbers, one can see clearly why Saudi Arabia said they were going to protect their market share this time around:

Right or wrong, this is a 30-second soundbite from DailyReckoning explaining the oil glut in the 1980s:

There were a lot of reasons for that oil price crash of the 1980s. Among them were that the high oil prices of the late 1970s, caused by the loss of oil output from Iran after the fall of the Shah and the Iranian Revolution, led to a worldwide recession.

The recession reduced demand for oil and allowed prices to fall. Also, a number of then new oil provinces of the world were coming on line, and oil output grew rapidly from nontraditional locales such as Alaska, the North Sea and Mexico. And one critical reason for the fall in the price of oil was purely geopolitical, in that the Saudis maximized oil production to drive the price down and hurt the economic interests of the Soviet Union, which had invaded Afghanistan in 1979. By reducing the price of oil, the Saudis indirectly deprived the Soviets of a key source of hard currency, from the sale of Soviet oil for U.S. dollars. As the Mogambo Guru likes to say, “Everything is connected to everything else.”

But as I mentioned above, the falling price of oil severely harmed the world oil patch.

Only the “best” prospects were drilled, and the low-cost oil was extracted and sold at relatively low prices (in retrospect, the prices were ridiculously low). The more high-priced oil was uneconomic to extract, and hundreds of thousands of oil wells across the world, particularly in the United States and Canada, were plugged and abandoned.

Perhaps it made economic sense to plug the marginal wells when oil was selling for $10 or $15 per barrel. But today, when oil is selling for $60 or more per barrel, don’t we wish that we still had many of these old wells, even producing just a few barrels per day? And many elements of the vendor base went out of business as well. From drilling companies to equipment makers to service providers, there was a severe contraction within the oil and gas industry. But with oil appearing “cheap” based on its nominal price, no one was calculating the long-term price to be paid. 

Earlier this year, The Wall Street Journal also spoke of the past:

A surge of oil from outside of the Middle East flooded global energy markets. The world-wide thirst for crude didn’t keep up. The Organization of the Petroleum Exporting Countries stood by and watched as oil prices fell and then fell more.

Welcome to the world of oil in 2015—a repeat in surprising ways of the story 30 years ago. Between November 1985 and March 1986, the price of crude plunged by 67%. Between June 2014 and today, crude prices have fallen by 57% and could well head lower.

Weekly Crude And Natural Gas Data Points -- September 17, 2015

Tweeting now:

Persian Gulf diesel exports will set monthly record in September, with estimates around 1.5 mil mt.

Regular readers might recall that Saudi Arabia has been greatly expanding their refining capacity so this is not surprising.

Also tweeting now:

 NYMEX oil price jumped >$2/bbl on Sept. 16 (yesterday) after EIAgov report showed lower-than-expected oil, product inventories.

OPEC crude oil exports to rise by 100,000 b/d to average 23.83 mil b/d in 4 weeks to Oct 3

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US Energy

Natural gas fill rate (dynamic link): 73. In the East Region, stocks were 38 Bcf below the 5-year average following net injections of 50 Bcf.

Gasoline demand continues to plummet -- something I did not expect -- but look at the graph at the link at the very bottom of the page.  Gasoline demand this year is exceeding last year's demand but has dropped off remarkably. If one uses gasoline demand as a proxy for the economy of the country / a proxy for the recovery, this is a scary graph. I think this most recent data includes Labor Day weekend which is even more concerning, especially given the price of gasoline -- record lows.

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Housing Starts Fall

Speaking of the economy, Reuters is reporting that housing starts fell for the second straight month in August.

ND Regulators Deny Xcel Energy's Request To Help Fund Minnesota Solar Power Project; $2.5 Million/MW -- September 17, 2015

They say the price of solar energy is coming down. Look at the figures below.

The other day I had a short piece on "rent seekers," a concept I never understood very well. Here's another good example. I wasn't going to post this story for various reasons, but more than one reader has sent me the link, so this is an opportunity to help reinforce the concept of rent seeking.

The Grand Forks Herald is reporting:

For the second time this summer, North Dakota utility regulators on Wednesday railed against the idea of allowing Minneapolis-based Xcel Energy to charge North Dakota ratepayers for solar power to meet a Minnesota mandate.

The $250 million project will consist of solar arrays in 16 counties in southern Minnesota. North Dakota would share in roughly 5 percent of the energy and 5 percent of Xcel’s cost of purchasing the power.

But commissioners denied the request 3-0 on Wednesday, repeating the arguments they made on June 17 when they unanimously rejected Xcel’s ADP request for 187 megawatts of solar power from three projects in Minnesota.

The Bismarck Tribune also has the story. It will be interesting to see if Debbie Downer publishes this story [Update -- at 11:11 a.m. Debbie Downer has not yet posted this story; must be a real downer for them]. [Update, September 19, 2015: again, I am unable to find any "evidence" the Debbie Downer reported this story; remarkable considering DD reports every other story on solar energy in Minnesota/North Dakota]:

North Dakota utility regulators on Wednesday renewed their opposition to having the state's ratepayers subsidize solar-generated electricity projects in Minnesota to satisfy that state's mandate to get some power from the sun.

Minneapolis-based Xcel Energy Inc., which has about 90,000 customers in North Dakota, is backing a $250 million solar project in southern Minnesota that would create 100 megawatts of power, or enough to power about 15,000 homes. The project is part of Minnesota's mandate that investor-owned utilities get 1.5 percent of their power from the sun by 2020, and 10 percent by 2030.

North Dakota law allows utilities to seek an advanced review, called a "determination of prudence," of whether regulators believe a project is a good idea and companies can charge ratepayers to help fund it.

The three-member, all-Republican North Dakota Public Service Commission voted against endorsing the project, saying North Dakota customers shouldn't get stuck with paying for expensive and unneeded solar-generated electricity from neighboring Minnesota.

"This just doesn't cut the mustard by any means," Commissioner Brian Kalk said. "This isn't an anti-solar message, it's just not prudent."

The Public Service Commission's action Wednesday was the second time this year that the panel shot down Xcel Energy's plans for solar projects. In June, the commission failed to endorse a 187-megawatt solar project that would power about 41,000 homes. The cost of that project has not been disclosed by the company.

$250 million / 100 MW = $2.50 million (and I assume this is a "low-ball" / conservative estimate).

From an August 25, 2014, post, this is 30-second sound bite for "cost of renewable megawatt":

• Solar: $3 million / MW
• Wind: $2.5 million / MW
• Natural gas: $865,000 / MW

 A recent Milwaukee solar energy project was estimated at $6 million / MW.

The CEO of Xcel Energy makes about $3 million / year.

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No Link, Being Reported Everywhere

President Obama's DOD training program to take on ISIS;  "4 or 5" soldiers; $500 million.

Just kidding, here's one of the links:

Gen. Lloyd Austin, who leads the U.S. military’s Central Command, told the Senate Armed Services Committee on Wednesday there are only four or five Syrian fighters left out of 54 who were trained as part of a [$500 million] U.S. program.

Another 100-120 fighters will be trained in the program’s three remaining classes, NBC News reported Wednesday.

Obama said in September that assisting Syrian rebels was “the best counterweight” for combating the Sunni radical terror group’s control over large swathes of Iraq and Syria, NBC reported.

I can't make this stuff up. This general even admits he doesn't know whether it's four or whether its five "Syrian" fighters. Whatever happened to $60 hammers and $600 toilets or whatever it was. Don't even talk to me about rent seekers in corporate America.

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A Note For The Granddaughters 

Last night driving home from water polo practice, I happened to mention something to our oldest granddaughter about irony. She said, coincidentally, they had been studying the difference between irony and coincidence in school earlier that day.

I was blown away when she said that she particularly enjoyed "dramatic irony." She said she loved seeing "dramatic irony" in the books that she read; she said she would like to reach out and slap some of those characters when they were completely clueless.

I thought it ironic that I just wrote about irony a few weeks ago. Except if I told our granddaughter that, she would correct that: it was a coincidence, not irony.

Initial Jobless Claims Plunge 11,000 -- September 17, 2015

From ycharts:

US Initial Jobless Claims is at a current level of 264,000, a decrease of 11,000 or 4.00% from last week. This is a decrease of 52,000 or 16.46% from last year and is lower than the long term average of 360770.

Reuters reports:

Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 264,000 for the week ended September 12, 2015. That was the lowest reading since the week ended July 18.

Economists polled by Reuters had forecast claims holding at 275,000 last week.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 3,250 to 272,500 last week.

The number seems a bit fishy, but it is what it is. Futures are down slightly.  

Poll: will the Fed "raise the rate" today? Yes/no? Update: the rate was left unchanged!

Poll results:

• the Fed will raise rates: 33%
• the Fed will NOT raise rates: 67%

A pretty smart group of readers. I was neutral; had no idea, but leaned ever so slightly to "would not raise rates."

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Notes From New York

The Huffington Post reports:

The New York Times reported Wednesday night that Gabay is dead.

An aide to New York Gov. Andrew Cuomo was shot in the head before a Labor Day parade in Brooklyn. Carey Gabay, 43, first deputy counsel in the Empire State Development Corporation, was declared brain dead on Tuesday and had been in critical condition since getting caught in the crossfire of alleged gang violence on Sept. 7, hours before the start of the massive West Indian Day Parade. Gabay was struck by a single bullet. 

The son of Jamaican immigrants who grew up in Bronx public housing, Gabay got a law degree at Harvard and joined Cuomo's administration in 2011 as an assistant counsel in the governor's office before moving to the ESDC, a development agency.

Active Rigs In North Dakota Flriting With New Post-Boom Lows -- September 17, 2015

Active rigs:

	9/17/2015	09/17/2014	09/17/2013	09/17/2012	09/17/2011
Active Rigs	69	198	180	196	199

RBN Energy: propane, part IV.

Surging domestic propane production in PADD 1 (East Coast) and PADD 2 (Mid-Continent) over the past four years is unlikely to result in an increase in traditional consumer propane demand in those regions, even with today’s lower overall domestic propane prices.  Most propane use in those markets is from the residential and commercial sectors, and that demand has been in a slow, steady decline for years due to competition from electricity and natural gas, efficiency improvements and the general population shift to warmer states.   In fact, the only sector of the U.S. market expected to see an increase in propane demand in the next few years is for its use as a feedstock to produce petrochemicals.  Most petrochemical demand has traditionally been centered at the Gulf Coast but is projected to expand on the East Coast as well. Today we detail current and projected propane demand.

This blog and others in the series are based on an analysis recently completed by RBN for the Propane Education and Research Council (PERC).  PERC engaged RBN to assess market developments that could impact the prospects of disruptions similar to the one that occurred in the Perfect Storm winter of 2013-14, and to suggest actions that could alleviate the risk of such market turmoil.  The project was completed in August and with the permission of PERC, this blog series summarizes some of RBN’s analysis and conclusions.

This is the fourth episode in the series. Episode 1 provided an overview and introduction to the analysis – beginning with the dramatic increase in propane production over the past 7 years. Total U.S. propane output has increased by 75% from an average of 0.8 MMb/d in 2008 to 1.4 MMb/d during the 1^st half of 2015. Most of that growth has been driven by production from gas processing plants that has more than doubled from 0.5 MMb/d in 2008 to 1.1 MMb/d in 2015. The overall growth in propane has outpaced domestic demand such that as much as 50% of the total is now exported to balance the market – even as inventories are at all time high levels. RBN’s analysis for PERC sought to understand changes to the propane market since the disruptive winter of 2013-14 as well as how susceptible today’s market is to similar events and what actions should be taken to reduce the risk of it happening again. Our approach to the analysis involved developing a monthly model of U.S. propane supply, demand, logistics and pricing at the PADD (Petroleum Administration District for Defense) level using historic propane market data. In Episode 2 we outlined supply and demand scenarios for the model based on oil price Growth and Contraction as well as Normal and Severe weather patterns. Episode 3 took a closer look at propane production by PADD region – noting the dramatic growth in the Northeast as well as the Mid-Continet. This time we look at historic and future propane demand by PADD region.