|
|
Wall Street History
https://www.gofundme.com/s3h2w8
|
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
|
|
|