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Energy
Review, Part II
Brian
Trumbore
President/Editor, StocksandNews.com
In his "State of the Union" address,
President Bush did what every president since Richard
Nixon has; call for America to reduce its dependence
on Middle East oil. This didn't go over well in the
Middle East, particularly in Saudi Arabia where the
kingdom feels like it's done its part to keep production
up at existing levels rather than cave to hardliners
in OPEC such as Iran and Venezuela who seek production
cuts. But that's a tale for "Week in Review."
As
a follow-up to some of the information I supplied
on the energy sector last time, the Wall Street Journal,
via the Energy Information Administration, had a good
table the other day on the top ten foreign suppliers
of crude oil to the U.S.
The
following nations account for about 50% of U.S. consumption.
Overall, the U.S. imports 60-65% of its oil (12.5-
13 million barrels of oil per day) out of total consumption
of 20.5-21.0 mmbd.
1.
Canada?.supplies the U.S. with 2.1 mmbd
2. Mexico?1.6
3. Saudi Arabia?1.5
4. Venezuela?1.5
5. Nigeria?1.1
6. Iraq?.0.534
7. Algeria?0.483
8. Angola?0.468
9. Russia?0.410
10. UK?.0.400
So
you can see why disruptions in hot spots such as Nigeria
and, potentially, Venezuela, can shake things up and
force the U.S. to make up the difference elsewhere.
---
Switching
gears, former secretary of defense, secretary of energy,
and director of central intelligence, James Schlesinger,
recently wrote a piece for the Winter 2005/06 issue
of The National Interest.
Titled
"Thinking Seriously About Energy and Oil's Future,"
it's a good outline of the current predicament facing
all consumers of crude.
Schlesinger
addressed the run-up in prices. There are both substantial
cyclical elements as well as "contradictions" at work.
"For
several decades, there has been spare capacity in
both oil production and refining. Volatile prices
for oil and low margins in refining have discouraged
investment. The International Energy Agency, which
expresses confidence in the adequacy of oil reserves,
urges substantially increased investment in new production
capacity and has recently warned that, in the absence
of such investment, oil prices will increase sharply.
Such an increase in investment clearly would be desirable,
but it is more easily said than done.
"In
the preceding period of low activity, both the personnel
and the physical capacity in the oil service industry
have diminished - and it will take time to recruit
and train personnel, to restore capacity and to produce
equipment. It is interesting to note that the capacity
of OPEC itself has shrunk in this last quarter- century
from 38 million barrels per day to 31 mmbd. The bulk
of the shrinkage occurred in Iran, Iraq and Libya,
which have been the targets of both U.S. and international
sanctions."
With
increasing demand from China, India and the U.S.,
production levels are an increasing concern.
"Three
additional points should be kept in mind. First, crude
oil production capacity has not been wholly exhausted.
The minister of petroleum of Saudi Arabia, Ali Naimi,
points to the unutilized 1.5 mmbd in his country and
states that he stands ready to serve additional buyers."
But
this extra capacity is largely unusable by U.S. and
other refiners, it being of the heavy, sour crude
that Saudi Arabia could bring onto the market in an
emergency. [Valero Energy is one refiner that can
process it easily and this is one of the many reasons
why that company in particular has been rocking and
rolling the past few years. That is NOT a stock recommendation,
however. I don't do that here.]
Schlesinger
continues:
"Second,
it is the international oil companies (IOCs) that
have lots of cash. Their inclination has been to invest
in new production capacity, counting only on prices
being in the range of $20 to $30 per barrel - and
not necessarily expecting the current high prices
to be sustained. But while the IOCs have the cash,
it is basically the national oil companies (NOCs)
that have the reserves."
For
the most part, the NOCs aren't allowing the IOCs to
take equity stakes, though there are signs this is
beginning to change.
"Third,
when gasoline prices are rising, public anger rises
at least correspondingly. Public anger immediately
draws the attention of politicians - and here in the
United States it elicits a special type of political
syndrome: wishful thinking."
Such
as on talk of energy independence.
In
the 1950s and 1960s, "oil production and consumption
more than doubled in each decade. Annual growth rates
in consumption of 8, 9 or 10 percent were typical."
But
no one expects a doubling of production in the future.
Most forecasts are for 50%, max, over the next two
decades. In other words, increased production will
not be able to meet rising demand.
The
biggest problem in terms of crude production is the
simple fact there have been only a handful of big
discoveries since 1975. Recently, Kuwait Oil Company
said its Burgan field, the world's second-largest,
is now past its peak production. News like this plays
into the hands of the Hubbert's Curve enthusiasts.
M.
King Hubbert was a geologist who years ago forecast
that production in the United States would level off
around 1970 and he was dead on. Dissenters, though,
have in Schlesinger's words "a deep (and touching)
faith in the market mechanism - and a belief that
over time market forces can adequately cope with any
limits on oil supply. In the extreme, some economists
have regarded oil supplies as almost inexhaustible."
Personally,
I'm in Schlesinger's camp. The former secretary concludes,
"(The transition) away from conventional oil as the
principal source of energy for raising the living
standards of the world's population?will be the greatest
challenge this country and the world will face - outside
of war. The longer we delay, the greater will be the
subsequent trauma. For this country, with its 4 percent
of the world's population, using 25 percent of the
world's oil, it will be especially severe?.
"Both
people and nations find it hard to deal with the inevitable.
Even though it was long recognized that a Category
4 or Category 5 hurricane would inevitably strike
New Orleans, a city substantially below sea level,
Hurricane Katrina reminds us that political systems
do not allocate much effort to dealing with distant
threats - even when those threats have a probability
of 100 percent.
"We
should heed a lesson from ancient Rome. In the towns
of Pompeii and Herculaneum, scant attention was paid
to that neighboring volcano, Vesuvius, smoking so
near to them. It had always been there. Till then,
it had caused little harm. The possibility of more
terrible consequences was ignored - until those communities
were buried in ten feet of ash."
---
Wall
Street History returns next week.
Brian
Trumbore
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