As you go further back in time, fewer links actually work.
Once again the administration has worked its wizardry in Iraq. They have divided the wizards into two working groups: one to insult the French, Russians, and Germans by banning them from Iraqi reconstruction work; the other to beg them for Iraqi debt forgiveness. To the untutored this looks like lunacy, but to the cognoscenti, aware of the previous brilliantly short-sighted positions on steel tariffs and the European defense force, it looks like lunacy at its inspired, bush league best. On the other hand, Pete could be totally wrong, and the ploy could prove so maladroit that it charms the French into playing along. q.v.
Pete must grant the wizards their due: they captured Saddam Hussein. Score a big one for the home team.
Pete's Quick Guide to Oil Price Forecasting
Or, the lower inventories, the higher prices, and vice versa. Here's the inventory situation with an EIA projection of likely future inventory levels:
The big question is why do inventory levels fluctuate as much as they do and spend so much time at the low end of the range, given the plethora of hedging mechanisms, the technical simplicity of adding to oil storage capacity, and the relative predictability of demand. For that you'd have to ask the oil companies.
Chart source: EIA
Once again Pete has been trying to figure out who reads these pages and is still glad to note readers (or at least their ISPs) come from all over the world. See the data for June, 2004. q.v.
We all know we can put the tap on the proverbial Belgian dentist yet again, since she's as easy a touch as ever there was. But should we? and should the decision to raise the federal debt limit come just before the election? q.v. It gets so tedious listening to US politicos proclaim the evils of deficit spending while seeking reelection based on doing the deed so well and so often.
White House praises DOE for management improvements. q.v. Now if they could just get an energy bill passed ...
Pete apologizes but he cannot resist a good perpetual motion machine when he sees one. qv1, qv2
IMF report on the problems with the US economy. q.v.
Interesting new EIA study of LNG. q.v.
Pete has trouble taking it seriously but it does qualify as interesting: the Association for the Study of Peak Oil and Gas, meeting in Berlin, was reportedly told by Ali Samsam Bakhtiari, said to be vice president of the National Iranian Oil Company, as follows: "The crisis is very, very near. World War III has started. It has already affected every single citizen of the Middle East. Soon it will spill over to affect every single citizen of the world. Syria’s oil production is in terminal decline. Yemen is following. Major Middle East producers, including Saudi Arabia, will peak soon or have already peaked. ... The present war cannot be confined to the Middle East. It will soon spill over to the rest of the world. The final implications will upset the global applecart." q.v.
It was nice of Lee Raymond, chairman of Exxon, to point it out q.v., but the boys over in Kerry's camp should have known better: energy independence isn't even a gleam of a remote possibility, unless you're talking balls to the wall breeder reactors, and they aren't. The real issue is how to keep the US from developing a natural gas jones as bad or worse than the oil dependence. That one at least has some rhetorical possibilities, and could be stopped or slowed down by an administration with vision and a little common sense.
EIA on nukes in China q.v. The more the better and sooner rather than later, thinks Pete. Now if only the non-mandarins that manage the home team would only pay attention.
Despite protestations that they were shocked, shocked by the news of prisoner mistreatment in Iraq, it turns out that the Bush administration had legalized the torture of Arab and Afghani partisans. q.v.
Revisiting Three Mile Island q.v.
Should the Saudis start taking payment in Euros? Even though Pete's favored the idea for a long time, the Saudis have decided not to do it just yet, fearing the Euro still lacks many of the qualities one would wish in a reserve currency. q.v.
Lots of activity in the tar sands box: according to Suncor, the biggest developer of Canadian tar sands, lots of money is being spent. They estimate that more than US$17 billion has been spent on tar sands development since the 90s, that $5 billion worth of projects are now under construction, and that $22 billion of projects are supposed to be completed by 2012. For an intro to the subject click here and then go to Oil Sands Energy Potential. For disclosure purposes, please note that Pete has a position in the stock because he believes that anything with 2.5 trillion in the resource size estimate is worth considering, no matter how little of that makes economic sense, nor how difficult the stuff may be to refine, nor how little may be Suncor's.
DOE and table top fusion. q.v. To find out what's happening with this tantalizing but somewhat suspect technology, click here.
Senator Kerry's plan to reduce oil prices. q.v. Pete's glad it isn't a repeat of the Clinton farce of gassing up Bill Richardson and having him threaten to open the taps on the strategic reserve. In fact, Pete agrees with Kerry's criticism that now is not a good time to be topping off the SPR.
It's time to celebrate Calouste Gulbenkian, born March 29, 1869. He was given 5% of major oil company revenues derived from the former Ottoman empire, and thus became fabulously wealthy. Mr. Five Percent earned his money by helping solve his era's overcapacity problem through a red-line drawn on a map dividing concessions into those that would be developed and those that would be held off the market until demand justified bringing them online. Too bad both sides of the red line have now been developed and there's too little surplus capacity to allocate. There'll soon be nothing for OPEC to do but collect money.
Assessment of hybrid cars q.v. How hybrid cars work. q.v.
Does deregulation do what proponents claim? q.v.
One in 73 US households declared bankruptcy last year. q.v. And that record was set with the lowest interest rates in 40 years. Households owe an aggregate $10.4 trillion in debt. Overall, all sectors of the US economy had debts of $34.4 trillion and produced an output of $11.3 trillion. The 3 to 1 ratio is even higher than the 2/5 to 1 that prevailed in 1933.
Background: Relationship Between Relative Current Account Deficit and the Dollar
Source: Morgan Stanley, (S. Roach commentary), using government data. Alan Greenspan's primer on on current account imbalances is also worth reading. q.v.
Getting Prices Right
... is not what EIA is good at. In fact, they're pretty useless. Here is the relevant section of their own report card.
Comparison of Absolute Average Percent Errors for Present and Current AEO Forecast Evaluations
Prices and Economic Variables
AEO82 to AEO98
AEO82 to AEO99
|AEO82 to AEO2000||AEO82 to AEO2001||AEO82 to AEO2002||AEO82 to AEO2003|
|World Oil Prices||51.3||56.7||55.7||55.4||49.9||48.9|
|Natural Gas Wellhead Prices||72.1||70.2||68.2||66.3||61.0||57.3|
|Coal Prices to Electric Generating Plants||35.3||35.9||36.6||39.6||36.4||35.7|
|Average Electricity Prices||11.0||11.1||11.8||14.0||11.4||11.3|
|Gross Domestic Product||5.0||5.0||5.7||5.9||6.4||6.7|
In fairness, they're much better at supply and demand, and you need to see the original table. q.v. But to consistently be this bad at forecasting prices suggests there may be an institutional problem, or that it can't be done, or that anyone, even Pete whistling in the dark with one hand tied behind his back, could do it about as well.
All Roads Lead to Inflation
Now that they've finally unveiled the energy bill*, it's painfully obvious to all that a decade's political labors were, if not wasted, then not very productive. We all knew it is a very difficult political problem in a democracy where everyone has a direct economic interest but wildly different conceptions of what will solve the problem, conceptions that range from the humdrum to the hallucinatory. Presumably Cheney, an old hand who does indeed understand the problem, the stakes, and the correct path forward, was the force behind the bill. If this is the best he could come up with, then we have what is possible. But the possible falls well short of what we need. Yes there are a few good things in the bill: financial guarantees for a new Alaskan gas pipeline, command construction of a few new nukes, and a limited number of other good things as well, but the bill is also full of irresponsible subsidies for fossil technologies that either don't need them or are in decline and will stay that way no matter how much deficit-increasing tax relief is pumped in, and still more tax subsidies for technologies that haven't had their day and never will.
Meanwhile, the Fed watches its money machine spew out new stimulus by the bale, while it furtively glances to the horizon to see if inflation is approaching. But if you want to see where all the inflation is going to come from, just watch dollar/euro and the invisibles portion of current account. Gold has rolled through $400 and may head further north once the rest of the world sees how little domestic energy reform Congress thinks it can get away with, and the beginning of the US trade skirmish with China.
The US seems to think that as a wealthy nation it will have the upper hand when it comes to competing for oil supplies at the margin. But it won't: the real long term test will turn on comparative energy intensity, measured in terms of energy support costs required for a marginal unit of production. Here is the point, as made by Andrew McKillop, "In simple terms: China uses about 1.5 barrels/head/year and the US about 25 b/h/y. One industrial worker in China therefore has a vastly smaller (say 15 times) lower energy support cost to the overall economy than one industrial worker in the USA...When oil prices rise, this difference of economy-wide energy productivity is critical [for] deciding which countries go into higher inflation, and which go into higher economic growth." The net economic benefit obtained by redoubling per capita energy consumption in China will be far greater than adding a few more b/h/y in the US. In fact, by that point the US will be scrambling to cut b/h/y and will wish the Congress of 2003 had done more to make the job easier.
*Unveiled, but not passed. The current word is that it may not be agreed to until January. And that would only be if Spencer Abraham, who is never lucky, gets lucky.
Germany Looks Out Over the Cliff, Doesn't Blink, and Jumps
Had anyone asked, Pete would have told them it was a huge mistake, but no one did: Germany went ahead and snuffed their first nuke. q.v. The phase out of the first of nineteen nuclear plants means German attempts to rely on the wind better work somewhat better than intermittently.
The chart shows EIA's estimate of recent Iraqi production. q.v. Note that since much of the major northern production zones are still unsecured, up to 300,000 bbls of that production is re-injected instead of exported. Still, progress has been made.
Roundup: The Role of Renewables in 2002
... remained very small, while solar and wind remained miniscule.
Liberals and Energy Policy
From a recent posting by Gavin Longmuir:
There was a time when Good Liberals were - well, good liberals. What happened?
Future energy supply is a tremendously important topic. Either we make tough decisions soon, or we live with very tough consequences later. It is irresponsible to waste time on partisan sniping about some inadequate Senate energy bill.
Global commercial energy demand today is running at about 12.5 Terawatts – a huge amount of energy, equivalent to the oil output of 21 (!) Saudi Arabias - and still 2/3 of the human beings on the planet are living in near-poverty. A good liberal who wanted to bring everyone in the world's growing population up to a decent standard of living (still well below that enjoyed today by energy-intensive economies) would have to plan on providing about 5 times as much energy, say 60 TW.
But future demand is likely to be even higher. 90% of current energy comes from fossil fuels, which have a high Energy Amplification factor. It takes energy to provide energy. If we put 1 Btu into developing and operating a large oil field, we can get back about 50 Btu over time. Unfortunately, all the alternative energy sources have low Energy Amplification factors - put 1 Btu into a wind farm, we might get 3 Btu back over many years. Considering lower Energy Amplification, we might need a total supply of over 100 TW to have enough Net Energy for human beings to use - maybe 10 times today's level of supply.
And where are we going to get 100 TW? Not from conventional oil & gas – there simply isn't enough. Not from hydro-power. If we ignored the environmental consequences and built hydro-electric dams on every possible site in the world, we might get 2 TW. Not from photovoltaics, to be sure. The best photovoltaic cells today have an Energy Amplification factor of about 1 to 1 - the energy they produce is only about the same as the energy it takes to make them, no Net Energy. Not from unconventional hydrocarbons like Canadian tar sands either - they also have a puny Energy Amplification factor. Coal? We all know the downsides.
There is no easy option. US citizens can't make the problem go away by voting for Howie Dean. Either we go forward in technology and build a new generation of advanced nuclear breeder reactors, or we condemn billions of human beings (possibly including ourselves, or our offspring) to lives that will be nasty, brutish, and short. The old good liberals would have known immediately the right way to go.
Oil Industry Results
ExxonMobil's produced record profits: net income for the first nine months of 2003 was a record $14,860 million, more than double the first nine months of 2002.
Third Quarter Nine Months 2003 2002 2003 2002 Net Income $ Millions 3,650 2,640 14,860 7,370 $ Per Common Share Assuming Dilution 0.55 0.39 2.22 1.08 Earnings Excluding Merger Effects, Discontinued Operations, Accounting Change and Other Special Items $ Millions 3,650 2,929 12,610 7,711 $ Per Common Share Assuming Dilution 0.55 0.44 1.88 1.13 Revenue - $ Millions 59,841 54,098 180,786 148,295 Capital & Exploration Expenditures - $ Millions 3,838 3,563 11,165 9,930 =======================================================================
BP earnings were up 25%:
Pro Forma Result Pro Forma Result adjusted for ----- 3Q 2003 --------------- adjusted for special items special items ------------------- 3Q 2Q 3Q Special Acq. Reported Nine Months 2002 2003 2003 Items* Amort+ Earnings $ million 2003 2002 =========================================== ============== Exploration and 3,050 3,589 3,813 - 293 3,520 Production 12,290 8,339 Gas, Power 87 103 98 - - 98 and Renewables 395 312 Refining and 522 1,135 978 318 205 455 Marketing 2,967 1,494 272 308 124 43 - 81 Petrochemicals 571 626 Other businesses (116) (134) (320) (10) - (310) and corporate (619) (369) ------------------------------------------- -------------- RC operating 3,815 5,001 4,693 351 498 3,844 profit 15,604 10,402 ------------------------------------------- -------------- (300) (191) (213) - - (213)Interest expense (624) (947) (1,213)(1,635)(1,569) (123) - (1,446)Taxation (5,139) (3,313) (3) (60) (43) - - (43)MSI (129) (62) ------------------------------------------- -------------- RC profit before 2,299 3,115 2,868 228 498 2,142 exceptional items 9,712 6,080 ------------------------------------------- -------------- 172 Exceptional items before tax (4)Taxation on exceptional items ----- 2,310 RC profit after exceptional items 84 Stock holding gains ----- 2,394 HC profit =====
Roundup: Summary of the European Energy/Transport Situation
Source: Presentation by the Directorate General for Energy and Transport, European Commission. q.v. Main policy measures are given here. q.v.
Coals to Newcastle
Pete's glad to see the administration has put its financial wizards on the Iraqi matter. It is said that Halliburton is buying gasoline from the Kuwaitis for $2.65 / gal. and selling it to the Iraqis at $0.15 / gal. q.v. Must be Californian wizards.
More to the point, and little heralded, it is also said the team running Iraq have managed to export 2 million bbls per day for the last two weeks.
Roundup: US CO2 Emissions
Goldman Sachs has put a few masters of the universe on the case and they've reached a conclusion: over the next 50 years the economies likely to do really well are Brazil, Russia, India and China, the BRIC economies. They anticipate that the 2050 world could see the BRIC economies collectively larger than the G6 economies. The study is well worth reading. q.v.
Roundup: The US Trade Imbalance
...has grown to absurd proportions:
It is time to remove a few of the structural mechanisms used by US trading partners that help keep the market from correcting. That doesn't mean that the rebalancing should come all at once -- or the dollar would drop to a dime -- but it must be allowed to start. Once it starts, interest rates will have to be used to control the drop (as the politically incorrect Treasury secretary keeps implying and the rest of the administration keeps denying), but it should never have been allowed to get so far out of hand in the first place. The longer it remains unchecked, the greater the dangers.
Pete was delighted to actually get a response from Exxon on the questions raised by Andrew McKillop about levels of world oil demand in 2015 (below). You may recall the original piece quoted Exxon's exploration chief to the effect that it was going to be a very difficult task for the oil industry to come up with the requisite amount of oil needed in 2015, while McKillop's back of the envelope calculations suggested the job was going to be even harder than Exxon assumed because demand would likely grow even faster than the rate implied by Exxon's figures. Here is the company's reply:
Here is the basic data from the EM database. These numbers can be found on our Intranet site. See Departments, Corporate Planning, then Energy and Economic Data.2003 2015 Change Annual % changeWorld Oil Demand, MBD 78 97 19 1.8World Gas Dmnd, MBDOE 45 62 17 2.7
Estimated production decline in 2015 from existing oil fields
Production in year t+1 is 95% of production in year t. Hence, existing production 12 years in the future is P(t+12) = P(t)* (.95)^12 or 54% of current production. Hence the total decline is 46% of current production
Decline in oil production: 0.46* 78 = 36
Decline in gas production: 0.46*45= 21
At a 6% decline rate the requirement is 101 mbdoe.
The reader is correct in his deduction that ExxonMobil's outlook for growth in demand for oil and gas is somewhat lower than forecasts made by other agencies, hence making the claim consistent with the midrange of the assumed decline rates. However, though other outlooks are somewhat higher, the differences are not large enough to affect the overall conclusion of the piece, as the reader seems to imply.
We believe the paragraph stands as written.
McKillop, when asked, commented that the growth rates he expected (2.2 % for oil and 4% for natural gas) remained much higher than Exxon's and that he therefore continued to be skeptical. All would agree that the indicated 46% decline is a huge number, as is the frighteningly large number that must be brought on line in the next twelve years.
To provide some context, EIA projects in the reference case that world oil production capacity in 2015 will by 103.3 Mbd without considering gas. q.v. (but also see the comparison q.v.). Certainly, overall EIA growth rates are closer to Exxon's than to McKillop's. q.v.
*Note from Pete: 93 million barrels of oil equivalent daily, which represents the sum of the growth in demand and the cumulative production decline. As a rough gauge, this is roughly the same as needing to bring on 10 Saudi Arabias in a little over a decade.
OPEC After Planned Production Cuts
|OPEC Member||Current Production (Mbd)||11/01/03 Quota||Implied Drop in Production|
|OPEC 10 Crude Oil Total||25,590||24,500||1,090|
Andrew McKillop on BP's Magic Curve
"In its ceaseless quest to present world supply-demand trends and factors as those supporting Cheap Oil, BP Amoco like ExxonMobil and other consumer nation ‘players’ in the world oil market necessarily has to provide logical seeming rationales. On the supply side, oil consumer nation agencies such as the OECD’s IEA and the US EIA, latterly joined by OPEC and Russian oil sector forecasting institutions (for different reasons), present a continuation of ‘structural oversupply’. That is, world oil supply will always tend to increase faster than demand. On the demand side, to lend credibility to this fundamentally impossible situation (see below), BP Amoco has created what can be called its ‘Magic Curve’. This purports to show that world oil demand growth is always trending downwards. Complete zero growth would be attained in about the year 2007. In other words, from about 2007, according to BP Amoco, all net demand growth for oil at the world level will shrink to zero – as if by magic !" more ...
(Note: Pete tried to
get BP to comment, but without success)
Common Sense, Banks, and Energy Derivatives
The Federal Reserve, showing at least as much chutzpah as Arial Sharon lobbing bombs into Syria, has decided to allow Citibank to wheel and deal in energy derivatives and other physical commodities as opposed to just being one of the largest banks in the world. q.v. One might have thought that since we have just learned the expensive way that utility executives are not good physical commodity traders, there wouldn't be too much interest in confirming that bankers aren't either.
That's not fair, you think. After all, the biggest and best banks, like Citibank, are already very good at hedging their risk. By any reckoning, every bank asset schedule is going to have a huge exposure to interest rate fluctuations, and there is every reason to encourage banks to hedge that exposure -- reduce that risk -- in any manner that bank management feels comfortable applying. Legitimate hedging is a commendable if somewhat expensive practice. But legitimate hedging requires laying off the risk inherent in holding a certain class of asset fundamental to the business, like customer repos or short-term commercial paper. However, if you are playing a market where you have no fundamental business risk to offset, you are, by definition, speculating. Nothing wrong with that either if you can afford to get it wrong, and are not being given the very special debt leveraging status that the federal regulatory system accords financial firms. But Citibank* is not seeking the right to use financial futures, which it already has; it wants to play in the physicals. And the big time in physicals equals the energy physicals. Citibank does not want to play just as principal in energy derivative transactions, but to take necessarily speculative positions as a form of commercial activity and to make actual delivery of the energy physicals.
What inherent risk would Citibank be hedging by, say, writing uncovered calls on the crack spread? None. It is no longer being a cautious banker, it is just another master of the universe trying to knock it out of the park. Nothing wrong with that either, except Citibank is way too big to be allowed to fail, so it means that Mrs. Millions and everyone else has become Citibank's partner, but only when it comes to sharing losses if they're bad enough. By playing, Citibank, or its proxy Phibro, would be performing many useful functions such as deepening liquidity, and adding expertise to the state of play, not to say adding to the latter's already substantial role as an oil importer. But it would still be speculating, even if it accepts deposits from large energy firms or backs their notes. The clients are the ones with a valid business interest in what happens to the crack spread, not Citibank. Yes, Phibro has an interest to hedge, but it can already do that: it is asking to own, transport, and sell large quantities of oil as a subsidiary of a bank. In essence, it wants to become the commodity importer tail with the power to wag the banking dog.
Congress knew this was dangerous and wrote special provisions into the law. Bank holding companies are only allowed to engage in these nonfinancial activities if the Fed makes a positive finding that they won't pose unacceptable risks to the safety of financial soundness of the bank, its subsidiaries, or the US financial system. Using a logic as inscrutable as an Alan Greenspan market analysis, the Fed manages to conclude that the activities Citibank wants to do are "incidental" to financial activity, since they are clearly commercial in nature, and therefore prohibited, but they are "complementary" to the activity of being a principal in certain derivative transactions, and therefore permitted. What nonsense. The Fed proves incapable of analyzing what the risks to the integrity of the banking system really are; instead, it just concludes that they couldn't be that great. Nor does the Fed even attempt the required statutory analysis that allowing bankers to become oil importers provides benefits in excess of risks.
And so it was that banks got to be players in, and not just financiers of, the energy business.
* Technically, every since it bought Phibro in1988, Citibank has had a major interest in the financial commodities business, but under special restrictive rules, that would otherwise have expired in October 2003. The Fed's ruling not only allows it to keep Philbro but to let it get into the more speculative end of the futures business.
Roundup: US Trade Deficit As A Percent of GDP
Source: Morgan Stanley using BEA data
BP's West Coast Refining Margins Are Greater Than $9 / bbl!
Somewhere down below Pete takes a swipe at BP based on Exxon's estimate of how much of a return the two companies made at various past price levels. Using the most recent forecast supplied by BP q.v., it appears they're doing more than just fine, thank you:
|Refining Indicator Margins ($/bbl)||3Q'03||2Q'03||1Q'03||3Q'02|
|- West Coast||9.04||6.34||6.77||3.54|
|- Gulf Coast||5.61||3.59||6.14||1.82|
|North West Europe||2.47||2.14||3.70||1.28|
|Refining Global Indicator Margin* ($/bbl.)||4.58||3.27||4.52||1.98|
"3Q'03 refining margins are expected to be higher than 2Q'03, particularly in the US, and similar to the overall margin environment of 1Q'03. 3Q'03 saw a number of refinery and infrastructure outages which coincided with an upturn in gasoline demand. Higher utility costs and adverse foreign exchange effects are expected to partially offset these higher margins. The 3Q'03 marketing environment is expected to be considerably less favorable than in the second quarter, and similar to the 1Q'03 level."
Pete still doesn't get why the poor Californians always have to pay so much more than the rest of us, even taking Arnold Schwarzenegger and Gray Davis into account. But for that matter, aren't the $5 - $6 margins the rest of us have to pay BP for refining a barrel of oil (which doesn't even include what they receive for producing it) pretty, uh, healthy, or wretchedly excessive, depending on your point of view?
Roundup: 10 Largest US Natural Gas Fields
The CIA's Curious View of the Energy Future
Pete's not exactly sure what those fellows over in Langley were smoking in 2000 but it must have been pretty good to come up with the following prediction of energy trends in the year 2015 q.v.:
Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms. Estimates of the world's total endowment of oil have steadily increased as technological progress in extracting oil from remote sources has enabled new discoveries and more efficient production. Recent estimates indicate that 80 percent of the world's available oil still remains in the ground, as does 95 percent of the world's natural gas.
- The Persian Gulf region—absent a major war—will see large increases in oil production capacity and will rise in its overall importance to the world energy market. Other areas of the world—including Russia, coastal West Africa, and Greenland—will also increase their role in global energy markets. Russia and the Middle East account for three-quarters of known gas reserves.
- Latin America—principally Venezuela, Mexico, and Brazil—has more than 117 billion barrels of proven oil reserves and potentially 114 billion barrels of undiscovered oil, according to the US Geological Survey. With foreign participation, Latin American production could increase from 9 million barrels per day to more than 14 million.
- Caspian energy development is likely to be in high gear by 2015. New transport routes for Caspian oil and gas exports that do not transit Russia will be operating.
Oil-producing countries will continue to exert leverage on the market to increase prices but are unlikely to achieve stable high prices. Energy prices are likely to become more unstable in the next 15 years, as periodic price hikes are followed by price collapses.
By 2015, global energy markets will have coalesced into two quasi-hemispheric patterns. Asia's energy needs will be met either through coal from the region or from oil and gas supplies from the Persian Gulf, Central Asia, and Russia. Western Europe and the Western Hemisphere will draw on the Atlantic Basin for their energy sources at world prices.
Hope the 'Atlantic Basin' doesn't prove as elusive as the Iraqi WMD.
Open Season on China
One member of Congress Pete respects is Jim Leach. Jim Leach, among other weighty responsibilities (the others mostly concern banking), is chairman of the House International Relations Subcommittee on Asia and the Pacific. In this capacity, he has just released the first, but certainly not the last, salvo in what will soon be a concerted US campaign against China. q.v. This has Pete somewhat confused since he thought republican stalwarts were by definition dyed-in-the-wool free-traders. But since no one can get the economy to start producing jobs in the necessary numbers, and since, when last seen, more than a few jobs were drifting off to the east q.v., a flood of legislation is on the way to force US tariff retaliation against the Chinese for some cobbled together offenses against the spirit of the WTO or something. The Chinese have nimbly pulled off the strategy of running astonishingly large and growing trade surpluses with the US while tying the RHB to the dollar to prevent the necessary rebalancing. No one knows whether the threat of ruinous tariff increases will be enough to do the trick,* but coupled with the G-7 ministerial warning to the effect that that the dollar must be allowed to decline, it may finally be time for Pete's longest running incorrect prediction -- that the Belgian dentist will soon want her money back -- to at last come true. Of course, Pete has never been right about this before, but it is bound to happen one of these days.
*Exactly which trick is an open question. Last time threats of this sort were generally put into force, the result was the great depression.
Fuel Switching Away from Natural Gas
The figure shows National Petroleum Council estimates of the price points when the industrial sector begins to switch out of natural gas, at least for the short-term. q.v. Assuming the storage build doesn't reach 3 Tcf toward the end of October (it's at 2.69 Tcf as of 9/19/03), it would make sense to consider the temporary removal of air quality restrictions on boilers burning resid through April, 2004, or at least take the steps required to have that authority in place.
It's Official: Pete Was Right
Turns out that after years of warning that there wasn't enough natural gas to support projected demand, Pete has some interesting support: the oil industry, through the National Petroleum Council. qv1, qv2. Too bad a huge amount of capital sits exposed that had been betting the other way.
Spencer's Snake Oil
Regrettably, the energy secretary has been lifting the comically deceptive lines of under secretary of state Paula Dobriansky. His latest statement on climate change repeats her more or less word for word:
[The administration has] an ambitious national goal to reduce by 18 percent over the next 10 years the greenhouse gas intensity, or emissions per unit of economic output, of the U.S. economy. Achieving this 18 percent reduction goal will result in the United States reducing the 183 metric tons of greenhouse emissions per million dollars GDP that we emit today to 151 metric tons per million dollars GDP in 2012. And meeting this commitment will achieve 100 million metric tons of reduced emissions in 2012 alone, with more than 500 million metric tons in cumulative carbon-equivalent emissions reductions through 2012 -- an amount equal to taking 70 million cars off the road. q.v.
This is like a rich fat man being told by his doctor that he had to lose some weight. Unwilling to do so, but knowing the stock markets were heading north, he makes his doctor a counter-offer: the ratio of his weight to his net worth will go down. Will he actually lose weight? No, he'll go right on gaining weight and further endangering his health, but so long as he becomes richer faster than fatter he has kept his promise. To give the offer even more appeal, he also calculates the implied difference between the before and after ratios in terms of cream pies not consumed, even though he knows full well they will be. Will his doctor accept this folly as a strategy? Of course not. Poor old Spencer and Paula, for just how much longer can they keep selling the same old snake oil? No one is buying.
Sec. Abraham has at least has toned down some of Ms. Dobriansky's rhetoric with a sobering admission about all of the wonderful future technological changes that are going to cause the energy intensity ratio to fall:
We will also need to develop the revolutionary technologies to make these reductions happen. That means creating the kinds of technologies that do not simply refine current energy systems, but actually transform the way we produce and consume energy.
When those technologies are developed, we will all exceed our targets. If they are not developed, we will all fail.
So if we really screw up the Earth's climate, uninvented and, one could argue, uninventable, technology will be to blame.
Here's the basic data so you can see how dodgy a strategy it really is:
Round Up: German Oil Consumption
Almost all of German oil consumption is imported, but Germany has managed to reduce dependence on imports from OPEC by increasing crude supplies from Russia and other European exporters. Oil consumption has basically been flat, and has even declined in the last year or two due mostly to the economic decline. This, plus a very large commitment to renewables, has allowed the government to set the goal of reducing by 2012 CO2 emissions by 21% from their 1990 levels. q.v. By contrast, the US does not intend to reduce CO2 emissions at all, which are already considerably greater than 1990 levels, just the relative amount emitted in relation to growth in GDP.
Which Major Consistently Makes Money Most Efficiently?
According to ExxonMobil, it's ExxonMobil, no matter what the oil price may be doing. q.v. The chart shows return on capital employed at various oil price levels. Pete finds it strange that BP earned a smaller return with $20-25 oil than with $10-15 oil. Maybe that's why BP is trying to get beyond petroleum.
Chinese Crude Imports Up Another 30 Percent
Same Period of Last Year
Source: Selected official statistics from the Chinese Ministry of Commerce q.v. Note from the same report that auto imports are up 57%.
Quick Guide to Countries With and Without Energy Policies
Several readers have written to ding Pete with failing to notice the different GDP growth rates and even birth rates between the two countries. While they are undoubtedly correct, and Pete stands duly dinged, his point was a concise and polemical one rather than anything so quotidian as using logical inference from real data.
Net Export Capacity As The Real Constraint
Jeffery Brown has submitted the following report on oil export capacity:
I wonder if we may have been missing the trees by focusing on the forest, i.e., we have all been focusing on global supply and demand figures for oil, while not paying attention to what may be much more important--net export capacity.
According to the EIA, the top 13 oil exporting countries -- those capable of exporting at least one Mbd (Million barrels per day) in calendar year 2000 -- together produced an average of 44.6 Mbd. They consumed an average of 11 Mbd, yielding net average exports of 33.6 Mbd. The top 13 exporting countries in 2000, in descending order, were: Saudi Arabia; Russia; Norway; Venezuela; Iran; UAE; Iraq; Kuwait; Nigeria; Mexico; Libya; Algeria and the United Kingdom.
Note that there are two factors that affect net exports--production and consumption. For example, let’s assume that we have a country that produced 2.8 Mbd in 2000 and consumed 1.7 Mbd, which yielded net exports of 1.1 Mbd. In 2003, let’s assume that they produced 2.2 Mbd, consumed 1.78 Mbd, and exported 0.42 Mbd. Production would have dropped by 21%, but net exports would have dropped by 62%. This a real life example, the United Kingdom. The only guess was the consumption level for 2003.
According to the EIA, through the first five months of 2003, the same 13 exporting countries (assuming a production level of one Mbd for Iraq), produced an average 41.8 Mbd. Assuming a slightly higher consumption rate of about 11.5 Mbd, this indicates an export level of 30.3 Mbd from these 13 countries--which is almost a 10% drop in exports from these 13 countries from calendar year 2000 through the first five months of 2003. There are obviously some geopolitical aspects to some of the production declines from 2000 to 2003, e.g., Iraq and Venezuela. However, this does not lessen the fact that the production declines are real, and there have been some substantial and permanent natural declines in countries such as Norway and the United Kingdom. 11 of the 13 countries showed a decline in production, no change or at most a 100,000 bd increase. Algeria showed an increase of 200,000 bd, and Russia showed an increase of 1.2 Mbd.
There may be some shut-in capacity, but there is a question of what the number is. In a recent interview, Matt Simmons said that after reviewing over 100 technical papers he thinks that there is a real chance that Saudi Arabia is near or past its peak sustainable production level. To give you idea of what this means, the largest oil field in the world, Ghawar (in Saudi Arabia), is producing about 3.5 Mbd. This one field therefore accounts for about 12% of current exports (from the top 13 countries). Ghawar is 56 years old, and at least half of the oil has been produced. The remaining oil in place is in the upper portion of the reservoir--which has lower porosity and permeability than the underlying water leg--and the current water cut in the field is about 20%.
This gets really scary when one also considers the increasing demand for oil imports. China’s oil imports alone have been increasing at a hyperbolic rate of 30% per year since 1999, which means that their demand for imports is doubling about every 2.4 years. At the current rate of growth in demand, China alone will consume 100% of currently available exports in 10 years--assuming no growth in demand elsewhere and assuming no falloff in production.
I think that the key question facing us is how scarce energy resources will be allocated--through market forces or through force. This also applies domestically. Before energy can get from producing states to consuming states, the energy has to first get out of the PRODUCING states. Do we rely on market forces to distribute net energy from producing states, or does the federal government step in and institute a rationing system?
Quick Guide to World Oil Movements in 2002
Each day about 44 million barrels of oil leave one region of the world for transit to and consumption in another. As the table below shows, the US and Europe are two very important destinations, but are eclipsed in importance by Asia.
Movements From \ To
(Thousand bbls per day)
|USA||Europe||China||Japan||Other Asia Pacific||Rest of World||Total|
|South & Central America||2420||274||19||6||115||131||2965|
|Former Soviet Union||201||4349||166||24||214||415||5370|
|East & Southern Africa||-||-||129||30||16||0||175|
|Other Asia Pacific||171||94||585||581||271||401||2103|
Adapted from BP Statistical Review of World Energy 2003 q.v.
Round-Up: US Natural Gas Consumption by Sector 1973-2002
Pete's Quick Guide to What Foreigners Know That The Locals Can't Figure Out
Even though foreign companies continued to increase their concentration in domestic uranium production, actual uranium production by these companies declined, and production by other U.S. companies declined even more rapidly while more US companies got out of the business. q.v. So even though foreigners are becoming much more important to uranium production, the industry continues to dwindle to near insignificance.
Energy and Housing (3): What Happens When Trillions Start Sloshing Around
Having burst the stock market bubble, the Fed took interest rates down to the lowest levels in 40 years to try and stimulate the economy toward recovery. This helped create a boom in housing refinance and housing prices, which only now shows signs of abating. But is it another bubble? How safe is the housing market? Most people, based on long experience, assume it to be far more stable than all other markets for financial or physical assets, as it almost always has been. However, there is reason to be concerned by recent events, including the impact of sustained higher residential energy prices as one among many threats to an overextended market. Richard Benson, of Specialty Finance Corp., has issued a very bearish appraisal. q.v. "Our honest opinion is that Fannie Mae and Freddie Mac are running massive hedge fund balance sheets. The equity base is 2%, leverage is over 50 times. [Their] derivative positions are in the trillions of dollars, and their accounting is totally opaque, and impossible to figure out. Mortgage holdings of this size are impossible to hedge without blowing through [their] eggshell thin equity layer."
Pete regrets that he totally failed to predict the outage and draws your attention to the Rocky Mountain Institute which claims it did q.v. Hah. However, grid failure was accurately predicted. Here are a few of the points made by David Cook of the National Electric Reliability Council in his testimony q.v. on 10/10/01 at a House Subcommittee on Energy and Air Quality hearing:
FERC noted in its official statement following the breakdown (to reassure us?), "Right now, there is no federal regulatory authority over reliability..." q.v. So, like it or not, the public again gets the short end of the deregulation stick, because no one bothered to see if the industry was spending enough to ensure redundant and reliable capacity, and because prices certainly haven't been declining. Does deregulation mean under-investment by definition or is that just the way it usually works out?
*Selected quotes in rearranged order. As always, it is better to read the complete original.
Pete's Quick Guide to Japanese LNG Imports and Layer Cake
"[According to a Japanese government analysis] In the standard case of supply and demand of energy where current policies are maintained, Japan's total primary energy supply in 2010 is expected to be about 622 crude oil equivalent million kl, with natural gas accounting for 82 crude oil equivalent million kl. Furthermore, in the target case where Japan achieves a stable energy supply as it continues to meet demands for environmental conservation and the promotion of energy efficiency, results of a test calculation indicate Japan's total primary energy supply in 2010 would be approximately 602 crude oil equivalent million kl, with natural gas accounting for 83 crude oil equivalent million kl (approximately 14% of the total supply)." q.v.
Admittedly, the topic is a little far a field, but what a nice data display. Looks like a layer cake. Every five years or so the Japanese iron chefs have to go out and add another layer. The inference from the accompanying text is that a few more layers are in the works. It's a shame Pete was too lazy to go out and construct a similar layer cake for US oil imports, but that cake, particularly in light of Jon Thompson's comments quoted below, is going to have to have a great many layers ready to add just to get us 20 years down the road. Of course, Iraq is a nice layer (whose layer is it anyway?) and the Caspian isn't bad, nor offshore west Africa, but where are the layers after that? And what about the Chinese/German/Australian/Japanese cakes? Isn't the lesson of Iraq that it's a new game governed by force rather than law, and therefore shouldn't those countries be out there looking for some serious iron chefs of their own?
Natural Gas (6) Mid-Season Update
The chart below shows EIA's latest figures for the working gas inventory build up. q.v. There's still a long way to go until a reasonable inventory level of about 3Tcf is reached, but EIA's most recent forecast anticipates that it is obtainable. q.v.
Even though the west has been unusually hot, the east, midwest, and south have tended toward the cool and wet, reducing the demand for natural gas to fire electricity production for air conditioning. Another potential problem area, the shutting down of one or more light water nuclear reactors because of problems caused by boric acid corrosion build-up, hasn't occurred, meaning that all that can go well has gone well. So it looks as though the industry is doing a good job getting ready for the winter heating season.
There's been a lot of discussion about how much gas should be in storage before the winter heating season begins. The table below shows actual working gas in storage in the peak months of October and November:
|Using Oct as peak month||U.S. Natural Gas in Underground Storage (Working Gas) (Bcf)||Using Nov as peak month||U.S. Natural Gas in Underground Storage (Working Gas) (Bcf)|
|Five Yr. Avg.||3,051||2,969|
There's no law saying what it must be but note that the outlier year of 2000 produced what was, until last spring, the lowest working gas storage levels ever seen the following spring, meaning natural gas prices had to spike upwards to produce the record storage inventory levels in place by the beginning of the following heating season. Prices this year have been even higher but it does not look like the Nov. 2001 level will be matched. Still, 3 Tcf would be a major accomplishment.