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Stock Market Trend Forecast March to September 2019

The Energy Crisis That Wasn't

Commodities / Energy Resources Sep 21, 2012 - 09:14 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleThe real energy prospect is the world now faces a problem of newly found, or newly developed, and ever increasing energy resources and supplies - not a crisis of energy scarcity.

The turnaround has been lightning rapid, in at most 5 to 7 years, and has wrongfooted many analysts, most politicians, and the world's "historic major" energy corporations, as well as the green movement and "ecology politicians" who still claim energy supplies are rapidly declining and we face an inexorable energy crisis - very like their residual attempts to peddle global warming apocalypse. In fact the prospect of us facing energy penury, shortage and scarcity has been turned upside down.


For anybody with the time to check out world energy history, this rapid turnaround is nothing new: energy resource and supply crises are the rule rather than exception. The history of world energy has been dotted by supply scarcity crises, and supply abundance crises. Also, the linkage with the economy is at best indirect, and almost always dephased in time, making "energy crisis" impacts more political, or even cultural, than economic. To be sure, current global political leaderships and the Greens have developed and profited from a scarcity-based fear theme on energy, rooted in the era of the 1970s Oil Shocks - which were temporary scarcity crises with a direct economic impact. Their major negative economic impact, we can note, was in major part due to the panic response of political deciders.

The coming energy crisis of unexpected abundance will also have a knock-on economic impact, but its first main impact will be on the credibility of energy scarcity claims, and the politics of energy scarcity.

 

ALTERNATE ENERGY
Even if we did not know this until recently, experience since 2008 certainly shows that alternate energy includes using less energy: energy saving is growing very fast in a context where the global economy and energy demand are not growing fast, adding further downward pressure on energy and oil prices. The outlook for energy demand recovering in the former richworld OECD countries, which are in their fourth year of stagnation or recession, is very weak. After the now well-known "jobless recovery" phenomenon, attributed by mainstream economists to productivity gains, we are set for "energyless recovery" when or if the economy moves out of stagnation and recession. Energy productivity in the economy, unlike job creation, is growing and is real.

 What was called "green" energy even two or three years ago, has now migrated away from the extremes of environmental advocacy - and has become plain old energy business. Today and for decades ahead, what we have is "new energy". What new energy does to global, regional, national and local energy supplies, patterns of demand and use, the perceptions of energy need in society, and its political treatment, is all unsure because of the size and reach of the new energy revolution, but the present betting is that abundance will transform a lot more than our current thinking on energy.

Only slowly, but growing all the time we have a dawning realisation that energy abundance is the new reality going forward - forward a long way and for a long time. The type of conventional energy crises - of shortage and undersupply - that were possible to forecast, as recently as 2000-2005 for the neartime future of about 2020-2030, are no longer on the menu. The alternate energy crises which are emerging will be as surprising, to many, as the surprise of energy abundance replacing "the scarcity paradigm" in an eyeblink of historical time. Until about 2009, supply shortage and energy depletion crises were the conventional wisdom and consensus view, and especially seemed to threaten conventional world oil and natural gas supplies.

Unconventional gas and unconventional oil have now pushed forward these depletion fears by at least 35 - 50 years, and perhaps much longer. For oil, due to the still-major role of conventional and declining oil reserves, the effect of new unconventional oil reserve finds and development will be slower than for natural gas, but the now extended and expanded "depletion interval" will make energy transition away from fossil fuels a much easier process. This is no longer a cliffhanger ! Claims still made by entities like the International Energy Agency, that a major oil supply pinch, or even garrot will be in place by 2017 are no longer rational, forcing the IEA to backtrack to its claims that CO2 levels are still rising dangerously and must be combated by oil saving and the development of green energy.
The doomster prophecy of terminal energy crisis coming "very soon" is out of synch with reality.

For the Green, in particular, the energy doomster theme will be hard to (using a favoured Green word) sustain, in a more complex and faster changing world energy scene where newfound energy abundance, for some, and restored energy abundance, for others, will generate their own new crises. From a scarcity crisis, we are moving rapidly into an energy abundance crisis with a ripple effect through the energy-economy, on energy company fortunes and strategies, on national policies and programmes that is becoming easier to map. This concerns all kinds and types of energy - both renewable energy and fossil energy - and as already noted above, also concerns simply not using energy at all, in an economy that is becoming "energy lean" much faster than many so-called experts thought.

THE US CRISIS OF ENERGY ABUNDANCE
For natural gas in the US the crisis of newfound abundance is starkly real: the country's biggest gas producer companies face hard times because there is already too much gas around. Gas prices are so derisorily low that bankruptcy - or at least corporate restructuring and forced asset sales - beckons them down a slippery slope they could not have imagined, five years ago. Abundance has done a lot more harm to Big Energy in the US, than penury. This new abundance is potentially very harmful to any conceivable marketable asset, commodity, product or service of energy companies, due to the intrinsic bias of market capitalism operating best when there is scarcity - while proclaiming the exact opposite.

The continuing saga of Chesapeake Energy Corporation, the USA's second-biggest producer of natural gas shows the impact of unexpected energy abundance. Chesapeake has been forced to sell most of its Permian Basin properties to Royal Dutch Shell and Chevron Corp, and a majority of its pipeline assets, to raise about $6.9 billion in cash.  The company, which has been shedding assets to raise cash to meet an estimated $10 billion funding gap, said in August 2012 it would use the current asset sale proceeds to repay $4 billion of term loans late this year. The deal is part of the company's strategy to shift away from cheap natural gas into more-lucrative crude oil: the "Chesapeake saga" will certainly play out for at least another whole year in 2013.

Chesapeake and its main rivals including Exxon's gas subsidiary XTO Energy were leaders in discovering and developing unconventional natural gas and unconventional oil fields in the U.S. but their "asset plays" got out of hand, as the market price and value of their main tradable asset - gas - inexorably declined. Chesapeake and others like XTO Energy made a kneejerk response to the US shale gas revolution: they crowded into the shale gas bearing regions, buying out leading prospects for drilling in the Marcellus, Haynesville, Bossier, and Barnett formations dotted across the nation, and pushed ever forward into mixed shale gas and shale oil-bearing regions and their geological formations, such as the Niobrara and Bakken in Wyoming, Colorado and North Dakota.

To such an extent, that firstly America's landscapes are now forested with shale gas wells — 13 000 new ones a year, growing at about 35 a day in 2011, according to the American Petroleum Institute, increasing from 342 000 in year 2000, to 511 000 at the start of 2012. Secondly, this new "blue gold" rush drove up drilling lease prices for favourable prospects to casino capitalist frenetic highs. Lease prices that had been as low as $10 for the rights to drill over 1 acre could attain $10 000 an acre. Gas prices, however, went the other way, falling about 85% from their all-time peaks in 2005-2006.

In 2003-2004, the flamboyant Matt Simmons, a larger than life prophet of both Peak Oil and Peak Gas,  and others who banged the drum of energy scarcity such as the Chomsky-type conspiracy theorist Michael Ruppert were adamant that the US faces a "natural gas cliff". For them, gas crisis was a certainty within two years. Operators of US and global gas markets (who love scarcity) lost little time in cranking up US natural gas prices to the peak of around $16 per million BTU in winter 2005-2006.

In the first quarter of 2012, US natural gas prices averaged close to $2.52 per million BTU. This we can note prices gas energy in the US at about $17.40 per barrel equivalent - underlining how extremely and unreasonably high "100-dollar" oil prices still are, and why they are likely to fall, which will have even more extreme impacts on the fortunes of Big Energy. While it is no surprise at all that the US gas crisis of today is bad news for the gas producers, engaged in high cost prospecting and drilling, on land leases often purchased at sky high prices, the shock of abundance, when it spills over to oil and shrinks oil prices, the crisis will be even worse for Big Energy.

One ironic but completely predictable result will be a "new cycle" of oil supply shortage, as producers drop out and are forced out, when oil prices fall enough.

The adjective unconventional, which describes "shale fracture gas", extracted using the controversial technique of hydraulic fracturing, or "fracking", also applies to what is called "stranded" gas. These are unconventional gas resources - including large or massive isolated gas-only or gas-majority fields - often in deep offshore areas of the world with no previous history of oil or gas finds and production. While the US Energy Information Agency provisionally estimates US national shale gas reserves as about 70 000 billion (70 trillion) cubic metres of recoverable gas - roughly 22 years of current total world gas consumption - unconventional stranded gas finds now dwarf these numbers. Located in an ever growing number of "new regions", such as NW Australia, east Africa, the Caspian Sea, the Mediterranean, the western Atlantic and eastern Atlantic single field finds have been as high as 30 trillion cubic metres - in the Rovuma field found off Mozambique, in 2011.

The "natural gas cliff" is now the other way around: we have a towering cliff of future gas supply, so much that it is already threatening the financial survival of world-class oil and gas companies, who were simply not prepared for this incredible surge of recoverable resources. The US gas crisis - of oversupply, for producers - will surely reproduce itself outside the US: this is made more certain by other potential and existing unconventional gas finds, gas production and supply.

RUNAWAY GROWTH OF RENEWABLE ENERGY
Even more certain, seemingly ironic perhaps, renewable energy equipment producers and renewable energy supply operators are also confronted by a crisis of overproduction and oversupply: since 2011, their financial survival is at least as threatened as the financial survival of the Big Energy producers in the "fossil energy world".

Activity however continues, in both energy worlds. Taking renewable-source power production and according to the European Wind Energy Association, over the next three years 18 more offshore wind projects will become operational, lifting Europe's total offshore capacity to 9 000 MW. By 2020 on present plans the EU (+Norway) will have an offshore wind power capacity of 40 000 MW, and by 2030 this could reach 140 000 MW. In other words: the equivalent of one hundred and forty 1000 MW conventional power stations. This will only concern offshore wind, but in itself is a project of Apollo-like proportions. As we know, Germany's massive solar power capacity (about 28 000 MW able to attain about 24 000 MW peak output), combined with Germany's near-30 000 MW of windpower capacity can on some days of low demand, like weekends, already cover the country's entire electric power needs.

Among the "crossover" energy sources and systems we find renewable-source natural gas, often called "biogas". A quiet but real revolution in European farming, promoted by the EU's renewable energy development plans incorporated in each of the 27 member state's REAP (renewable energy action plans), is biogas recovery at the level of each farm using increasingly sophisticated and efficient methane gas recovery systems. This action has resulted in many European farms now approaching energy self-sufficiency for electricity, produced from recovered biogas. Seven years ago, almost all European farms were totally dependent on grid power supply.

This is only a symbolic slice of the potentials in "new energy" for biogas and related biofuels production. At the highest level, when or if AGP (artificial global photosynthesis) and nanotechnology-aided chemical processing are developed, this may deliver ultimate-scale breakthroughs. Extracting CH4 (methane gas) from all types of artificially produced organic materials, or combining C and H in organic or even inorganic source materials, at high net energy yield, the need for any kind of fossil fuel will have simply and totally disappeared.

The present real world revolution in renewable energy, which is most powerful in Europe, China, the US and is growing fast in many other countries, mainly concerns unconventional electricity production: that is power from non-fossil energy sources, especially from the "new renewables" windpower and sunlight energy. Costs-per-unit energy output have followed producer company financial fortunes down to the ground, to the graveyard dug by equity trader asset speculation, and by rampant overproduction of wind and solar power equipment, as the industrial production capacity of this equipment has exploded. Solar and windpower are now a graveyard of corporate hubris and dreamspinning, but as in many other industries (a glaring example is major airlines) activity and production continues, under Chapter 11 bankruptcy protection where it is increasingly needed.

Renewable energy development continues in a wide range of other renewables, from conventional and unconventional  hydropower, to wave, tide and ocean thermal energy, geothermal energy, biomass heat, and others. Since around year 2000, development has made such giant strides we already have another Energy Revolution to line up with the incredible abundance of world gas resources.

AND NOW THE BLOWBACK
In the European Union, by midyear 2012, discussion of "energy transition" already has a deja vu ring to it. Despite the official "20-20-20 by 2020" targets for energy transition in Europe, set in December 2008 and including 20% of all energy coming from renewable sources, even the definition of "energy transition" in Europe is now losing focus, may have become impossible and is certainly controversial.

Since 2011, more and more EU27 member states apply their own national definitions, or interpretations as to what "energy transition" means to them, in part driven by public opinion blowback over the sky high costs and bad management of "energy transition". At the same time, nationalist politicians of many European countries now make increasing use of the so-called climate-energy transition package as a major issue, and another way to place a limit on European federalist inroads and encroachment into national affairs.

 As one simple example with complex impacts, European shale gas development is considered by some member states, such as Poland, as a key target for "alternate energy" development, while some other countries such as France, have shunned shale gas, at least officially and as far as domestic development of shale gas is concerned. This diverging process will be further intensified by a context where Europe's now "structural" economic recession can only lower the demand for energy, and continue reducing the need to rapidly develop often expensive "vanity tech" systems and infrastructures for going faster with radically expanding new and alternate supplies of energy, in a context where "new energy" supplies will inevitably continue to grow.

Driving the contradictions higher, the first and most powerful "reality shock" for green energy transition in Europe is that it has "grown like Topsy", almost out of control in the opinion not only of some editorialists, but also leading REAP administrators, and politicians in a growing number of EU member states. Leader countries in the energy transition process, especially Germany and Spain, have by 2012 attained targets set for 2020 for the share of solar and windpower in national electricity supplies. Saying that Europe's energy transition is a major technological and industrial success story, is nice for European Commission websites, but is already a financial, and could become an economic disaster. Whatever happens, however, Europe will have to live with its energy transition.

Europe's unexpected and deepening energy plight can be traced to one simple cause: the basic driver is too much energy of all kinds becoming available, too fast. This completely destroys the "basic requirement" of energy scarcity and penury, which underlaid all Green campaigns and advocacy, and enabled a generation of political and corporate leaders to work the fake crises of oil depletion and global warming to rack up energy taxes and prices, driving sections of the populations of former richworld countries into energy poverty - at a time of newfound energy abundance!

The blowback from unexpected and rapidly growing energy abundance not only concerns the "consumer masses". Like the aging of stars producing Red Giants and White Dwarfs, and their possible complete disappearance in a nova or supernova explosion, what were called The Seven Sisters, or "historic oil major" corporations are now faced with tough times. The USA's Exxon Mobil corporation, iself formed from the merging of two of the Seven Sisters, Exxon and Mobil, was the world's biggest company by market capitalization until, reflecting another mega change in the economy, and its virtualization, Apple moved into No 1 slot.  Exxon is still the world’s biggest oil company by market value, but its combined oil and gas reserves are now minuscule relative to those of a long list of both OPEC and non-OPEC national oil companies.

Using data for 2012 from Petrostrategies Inc, Exxon's combined oil and gas reserves place it 16th in the world - far behind the NOCs of Iran, the Gulf Arab states, Nigeria and Libya, and well behind Russia's Gazprom, Petro China - or even the Egyptian General Petroleum Corp.
http://www.petrostrategies.org/Links/worlds_largest_oil_and_gas_companies.htm
The other "historic majors" are in the same plight, even further down the pile than Exxon. Like it, they have shifted to the refining downstream, energy trading and non-energy activities - as well as gas production and the radically oversuccessful (for them) hunt for global natural gas resources. Exxon and the "historic majors" are now more vulnerable to the global economy's performance than ever before. They are very vulnerable to falling oil prices, and extremely exposed to the coming gas glut and falling global gas prices. When, rather than if, this is joined by falling oil prices the curtain could fall on Exxon - but for the moment this is a "heretic view".

Easier to get consensus, simple figures show how far the process of squeezing oil out of the global energy mix is proceeding: using IEA data comparing 1973 with 2009, the former richworld OECD group of countries obtained 52.6% of their total energy from oil in 1973, but this was down to 36% in 2009. Further decline is totally sure and certain, reinforcing the logic of the "historic oil majors" to simply not produce more oil, let its output decline and stealthily creep away from energy-only business, perhaps moving to making mobile phones?

LIGHT YEARS AWAY FROM THE REAL WORLD
On another planet, it seems, we can still hear Greens telling us about Peak Oil. Supply will decline, energy crisis is certain, shortage is coming - the message goes - even if the Greens have had to abandon the Peak Gas storyline. During France's presidential and parliamentary election of 2012, in which the ecology candidate at the presidentials, Eva Joly, received a sumptuous 2.3% of votes cast, her Europe Ecologie Les Verts party put out communiques like this:

"After more than a century of constantly growing oil production and consumption, Earth is now out of breath. The idea of "peak oil", previously ignored, is now a sombre and certain reality. This is shown by oil exploration and development efforts that always cost more in money, energy and other resources".
(Translation AMK, source http://blog.vertsconseilregionalauvergne.fr/post/2012/04/11/Appel-%22Mobiliser-la-société-face-au-pic-pétrolier%22).

Conventionally speaking of course, French Greens had it right: conventional oil has become so expensive it has priced itself out of the energy equation, creating several zero sum games for both the historic majors, and the oil-flush OPEC and non-OPEC national oil companies. High priced oil has accelerated energy saving alternate energy, as it has spurred renewable energy development: only the pace of change is a real surprise.

The first of these zero sum games is easy to explain: producing more oil, even maintaining output from conventional resources using conventional technology, costs more and more, and delivers ever smaller net increments in total output capacity after depletion losses. The oil produced is expensve, so oil prices have to stay high, because without high prices companies like Exxon would be unable to advance $37 billion a year, in 2012 , for achieving its corporate goal of adding 1 Mbdoe of net additional production capacity by 2016.

At the same time, out there in the real world, high oil prices result in a rising swell of oil-saving activity, and the production of all types of "new energy" able to replace oil. Certainly since 2008, any year in which world oil demand rose by even 1% is a flag day event; through 2011 and 2012 it is likely that world oil demand completely flat-lined.. Taking debt-strapped downsized and energy transiting Europe, 2012 was the sixth straight year of oil demand contraction.

Oil demand contraction has also started migrating away from the OECD countries, and has started threatening the formerly sure-and-certain, endlessly predicated "oil demand explosion" of Asian emerging countries. Surprise changes in Chinese and Indian oil demand now include ever falling rates of demand growth and rising oil substitution. Elsewhere, taking only US oil demand for its 200 million automobile fleet, in late 2012 this was about 8.8 Mbd, which is still far behind its all-time peak of over 9.4 Mbd in 2007. According to US analysts such as Deloitte in early August 2012, the rate of US auto sales to persons in the 18-to-34 age group declined from 17% of all sales in April 2007, to 11% in April 2012, mainly because younger people preferred to communicate by email, SMS and telephone, rather than endure the expensive hassle of consuming oil to achieve a physical meeting. Their urban based lifestyles and the weak economy also add up to lower desires, and demand, for cars. The long and loudly trumpeted call of car advertisers, that the car is still the No 1 gateway to independence for the young has flagged and shrunk. Urban lifestyles are decreasingly related to, or dependent on car ownership while non-car transport alternatives in urban areas continue to expand, worldwide.

The "no future for oil" thesis was often derided, even in the recent past. Since about 2005, and especially since 2008-2009 the thesis is becoming conventional reality. Reasons for this are simple, as well as complex, with the bottom line being a sure and certain erosion of oil prices.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Alter
09 Oct 12, 05:05
Factual error

The author should check his sources.

"Conventionally speaking of course, French Greens had it right... "

EELV is supposed to have released the communique about peak oil. Of course this is dead wrong : the green party in France hardly mentionned peak oil during the campaign - I suspect Eva Joly was not even aware of this problem.

The text is an editorial that was published in Le Monde, and while Yves Cochet (from the green party) signed this paper, he was the only green to do so.

The full list of signatories includes former Total executives (not so "green") : heads of strategy, exploration techniques and economic studies, who also have an expert opinion on the topic. It also includes members of the conservative UMP party.

The full text may be read at http://tribune-pic-petrolier.org/mobilizing-society-in-the-face-of-peak-oil/

Note : this link brings you straight to the full english translation of the text...


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