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03/31/2006

Daniel Yergin on the Energy Picture

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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-03/31/2006-      
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Wall Street History

03/31/2006

Daniel Yergin on the Energy Picture

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