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Daniel
Yergin on the Energy Picture
Brian
Trumbore
President/Editor, StocksandNews.com
When it comes to the issue of energy
these days, there's never a shortage of material.
Noted oil expert Daniel Yergin, chairman of Cambridge
Energy Research Associates, weighed in on the topic,
including "energy security," in the March / April
2006 issue of Foreign Affairs. Following are a few
excerpts.
---
Since
Churchill's day, the key to energy security has been
diversification. This remains true, but a wider approach
is now required that takes into account the rapid
evolution of the global energy trade, supply-chain
vulnerabilities, terrorism, and the integration of
major new economies into the world market.
---
For
China and India, energy security now lies in their
ability to rapidly adjust to their new independence
on global markets, which represents a major shift
away from their former commitments to self-sufficiency.
For Japan, it means offsetting its stark scarcity
of domestic resources through diversification, trade,
and investment. In Europe, the major debate centers
on how to manage dependence on imported natural gas
- and in most countries, aside from France and Finland,
whether to build new nuclear power plants and perhaps
to return to (clean) coal. And the United States must
face the uncomfortable fact that its goal of "energy
independence" - a phrase that has become a mantra
since it was first articulated by Richard Nixon four
weeks after the 1973 embargo was put in place - is
increasingly at odds with reality.
---
[Shocks
to Supply and Demand]
The
last decade has witnessed a substantial increase in
the world's demand for oil, primarily because of the
dramatic economic growth in developing countries,
in particular China and India. As late as 1993, China
was self-sufficient in oil. Since then, its GDP has
almost tripled and its demand for oil has more than
doubled. Today, China imports 3 million barrels of
oil per day, which accounts for almost half of its
total consumption. China's share of the world oil
market is about 8 percent, but its share of total
growth in demand since 2000 has been 30 percent. World
oil demand has grown by 7 million barrels per day
since 2000; of this growth, 2 million barrels each
day have gone to China. India's oil consumption is
currently less than 40 percent of China's, but because
India has now embarked on what the economist Vijay
Kelkar calls the "growth turnpike," its demand for
oil will accelerate?.
The
impact of growth in China, India, and elsewhere on
the global demand for energy has been far-reaching.
In the 1970s, North America consumed twice as much
oil as Asia. Last year, for the first time ever, Asia's
oil consumption exceeded North America's. The trend
will continue: half of the total growth in oil consumption
in the next 15 years will come from Asia, according
to projections by Cambridge Energy Research Associates.
However, Asia's growing impact became widely apparent
only in 2004, when the best global economic performance
in a generation translated into a "demand shock" -
that is, unexpected worldwide growth in petroleum
consumption that represented a rate of growth that
was more than double the annual average growth rates
of the preceding decade. China's demand in 2004 rose
by an extraordinary 16 percent compared to 2003, driven
partly by electricity bottlenecks that led to a surge
in oil use for improvised electric generation. The
result was the tightest oil market in three decades
(except for the first couple of months after Saddam's
invasion of Kuwait in 1990). Hardly any wells were
available to produce additional oil. That remains
the case today, and there is a further catch. What
additional oil might be produced cannot be easily
sold because it would not be of sufficiently good
quality to be used in the world's available oil refineries.
Refining
capacity is a major constraint on supply, because
there is a significant mismatch between the product
requirements of the world's consumers and refineries'
capabilities. Although often presented solely as a
U.S. problem, inadequate refining capacity is in fact
a global phenomenon. The biggest growth in demand
worldwide has been for what are called "middle distillates":
diesel, jet fuel, and heating oil.
---
The
current era of high oil prices really began in late
2002 and early 2003, just before the start of the
Iraq war, when President Hugo Chavez's drive to consolidate
his control over Venezuela's political system, state-owned
oil company, and oil revenues sparked strikes and
protests. This shut down oil production in Venezuela,
which had been among the most reliable of oil exporters
since World War II?.Venezuela's output has never fully
recovered.
[Ed.
In Iraq, oil exports are 30 to 40 percent below prewar
levels as needed investment has been slow to materialize
due to the insurgency and attacks on the infrastructure.]
Over
the past five years?Russia's oil fields have been
central to the growth of worldwide supply, providing
almost 40 percent of the world's total production
increase since 2000. But the growth of Russia's output
slowed substantially last year?.Meanwhile, despite
such problems in some major supplier countries, other
sources that get less attention, such as Brazil's
and Angola's offshore fields, were increasing their
output - until Hurricanes Katrina and Rita shut down
27 percent of U.S. oil production (as well as 21 percent
of U.S. refining capacity)?.Altogether, the experience
of the last couple of years confirms the maxim that
a tight market is a market vulnerable to events.
*Ed.
I won't get into details on Daniel Yergin's feelings
on "peak oil" except to say CERA believes a field-by-field
analysis of projects and development plans "indicates
that net productive capacity could increase by as
much as 20 to 25 percent over the next decade. Despite
the current pessimism, higher oil prices will do what
higher prices usually do: fuel growth in new supplies
by significantly increasing investment and by turning
marginal opportunities into commercial prospects (as
well as, of course, moderating demand and stimulating
the development of alternatives)."
---
Today,
the concept of energy security needs to be expanded
to include the protection of the entire energy supply
chain and infrastructure - an awesome task. In the
United States alone, there are more than 150 refineries,
4,000 offshore platforms, 160,000 miles of oil pipelines,
facilities to handle 15 million barrels of oil a day
of imports and exports, 10,400 power plants, 160,000
miles of high-voltage electric power transmission
lines and millions of miles of electric power distribution
wires, 410 underground gas storage fields, and 1.4
million miles of natural gas pipelines?.
The
challenge of energy security will grow more urgent
in the years ahead, because the scale of the global
trade in energy will grow substantially as world markets
become more integrated. Currently, every day some
40 million barrels of oil cross oceans on tankers;
by 2020, that number could jump to 67 million. By
then, the United States could be importing 70 percent
of its oil (compared to 58 percent today and 33 percent
in 1973), and so could China.
---
Although
often underrated, the impact of conservation on the
economy has been enormous over the past several decades.
Over the past 30 years, U.S. GDP has grown by 150
percent, while U.S. energy consumption has grown by
only 25 percent. In the 1970s and 1980s, many considered
that kind of decoupling impossible, or at least certain
to be economically ruinous. True, many of the gains
in energy efficiency have come because the U.S. economy
is "lighter"?.than it was three decades ago - that
is, GDP today is composed of less manufacturing and
more services?.But the basic point remains: conservation
has worked. Current and future advances in technology
could permit very large additional gains, which would
be highly beneficial not only for advanced economies
such as that of the United States, but also for the
economies of countries such as India and China.
---
Wall
Street History returns next week?seasonality.
Brian
Trumbore
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