Trends and Themes in Energy

There are three investment themes that will stand the test of time – energy, agriculture, and healthcare.  Why these three?  There are several mega-trends at work currently that will impact these three sectors of our economy and those outside the U.S.  One is rapid population growth in the developing countries and population decline in the developed countries.  Another is the transitioning of societies within the developing and developed countries, which impacts how humans live and interact with their economies and ecosystems.  I will address the energy sector in this blog (Part 1 of 3) and agriculture and healthcare in succeeding blogs.

As I have mentioned in previous blogs, there is portable energy and non-portable energy.  Non-portable energy is energy that cannot be consumed while in motion.  Examples of them would be nuclear (naval ships and submarines are exceptions), coal and solar (panels have been installed on vehicles, but primarily to power an automobile's electrical system) and wind.  Portable energy would include petroleum and petroleum-related products and natural gas (compressed natural gas – CNG, is beginning to be developed).

The reason that gasoline and diesel are almost exclusively used as portable energy, is because the energy per unit mass is far greater than any other practical fuel source (uranium is the highest, but not used for public transportation for obvious reasons).

Source: http://www.schoolphysics.co.uk/age16-19/Mechanics/Dynamics/text/Energy_density_of_fuels/index.html

Non-Portable Energy

The world is changing profoundly with regard to energy and energy consumption.  Several forces are at work, whether we like it or not.  The first is carbon emissions.  A global consensus is focusing on reducing carbon emissions.  Economies, corporation, and people are moving in lock step to reduce their carbon footprint.  They have heard the message, so the global warming crowd should rejoice in the fact that it is being done, though not as quickly as desired.  Natural gas production has increased over the past 10 years due to hydraulic fracturing of productive geologic formations, thereby reducing prices enough to cause a seismic shift away from coal to natural gas.  This switch is the major cause of carbon emission reduction in the U.S.  Should a carbon tax be applied, the consumer would be better served if the government were to tax carbon emissions, rather than let Wall Street capture the profit, though one could argue about the efficiency and utility of either. 

Second, the Fukushima Daiichi nuclear power plant disaster derailed the global nuclear renaissance.  While it is a bump in the road for nuclear power, we will not likely be able to do without it.  However, it is going to take additional time to rebuild public confidence.

Third, clean energy (solar, wind and hopefully others) is growing rapidly, despite it being uneconomic even with government subsidies.  High-cost solar companies have failed, while low-cost Chinese solar companies have succeeded and grown rapidly, causing solar panel prices to fall.  This has made solar panel installation more affordable, though paybacks are still years off.  Clean energy has not been without its critics, including environmentalists.  Even they have criticized solar farms for disturbing desert tortoises and wind farms for disrupting the migratory paths of birds.  We cannot have it all ways, especially when it severely limits economic growth and job growth. 

Fourth, the baby boom generation is beginning to return to its 1960s-1970s roots from living off the land to living off the grid.  While this is a minute percentage of the baby boomer generation, it is growing. 

Fifth, energy conservation is beginning to take hold.  I find that there is still low-hanging fruit to be picked.  This can be accomplished through new energy-saving products or retro-fitted products with intelligent power devices that scale back energy consumption or cut it off.

To summarize the changes in electrical production and consumption or trends:

·      Carbon emissions – down or moving lower in the U.S. (if anyone is to gain on this, it should be government versus Wall Street),

·      Natural gas production – up and prices down,

·      Coal production – down and adjusting downward until steady state is met,

·      Nuclear power generation – down or in steady state,

·      Solar and wind energy – up and prices down,

·      Conservation – increasing, and

·      Living off the grid – increasing.

Utilities will evaluate the energy sources available to them and their costs, before committing to major capital expenditures.  In Minnesota, Duluth-base Minnesota Power long relied almost exclusively on coal generation.  Last month, it announced that it would close one coal burner and convert two others to burn natural gas.  They would also add wind power and hydro and probably a new natural gas-fired generator.  The result will be to decrease coal dependency over time to one-third coal, and increasing to one-third natural gas and one-third renewable energy.  Other utilities will be moving in the same direction depending upon their input percentages of resource availability, such as hydropower, geothermal power, tidal power, nuclear reactors already in operations, etc.  These are large shifts away from the traditional coal-fired power generators of yore and long over due.

Portable Energy

Gasoline and diesel are still the major choices of transportation fuels, because of their higher energy density relative to other portable energy.  Natural gas is being considered and promoted by various entities, but storage and distribution remains an obstacle in building out the infrastructure.  

Oil production is up in the U.S. due to hydraulic fracturing of shale and sandstone.  This new drilling technique has been a panacea for job growth in North Dakota.  While oil production has increased there and else where, it has not returned to the high of 1970, when we produced 9.637 million barrels of petroleum per day.  The Energy Information Administration's (EIA) most recent data show that production is down 41% from that high to 5.648 million barrels per day.  This is barely above what we produced in 2003.  Mileage mandates are needed to close the gap.  Additionally, other fuel sources are needed to augment existing production, such as compressed natural gas (CNG), hybrid technology, or the elusive hydrogen fuel cell.  In any event, mileage mandates should encourage the development of new technologies.

The oil drilling renaissance that the U.S. has experienced, has created numerous positive outcomes:

·      Increased oil production (EIA, from 5.644 million barrels per day in 2003 to 5.648 million barrels per day in 2011, after bottoming in 2008 at 5.000 million barrels per day),

·      Improved the petroleum trade balance due to increased petroleum exports, which helped shrink the overall deficit by 21% in December to $38.5 billion, the smallest in three years, according to the Commerce Department on February 8, 2013),

·      Decreased demand for foreign imports,

·      Created high paying jobs from rig hands to engineers,

·      Lowered energy costs (natural gas), and

·      Increased energy security, causing companies like Dow Chemical and Royal Dutch Shell to build chemical plants in the U.S.  This could be the beginning of a “reshoring” renaissance of companies relocating manufacturing facilities and hence excellent paying jobs back to the U.S.

Subsectors within energy that should benefit from the mega-trends and societal shifts over time are: natural gas companies, solar companies, energy conservation device companies.

Gasoline prices take the biggest bite out of pretax income in 30 years

Yesterday, the Energy Information Administration (EIA) reported that the U.S. households in 2012 spent an average of $2,912 on gasoline, or just under 4 percent of their pretax income, the highest percentage in 30 years.  In 2008, the average household spent a similar amount.  

What is more interesting, is, that overall consumption has decreased in recent years.  This is due to efficiency gains accelerating over the past several years.  The EIA said that the total U.S. gasoline consumption fell in 2010 to 134.2 billion gallons, its lowest since 2001.  Obviously, prices have increased faster than the efficiency gains.  At the same time, EIA’s average city retail gasoline price rose 26.1% in 2011, and another 3.3% in 2012.  The 26.1% yearly increase in 2011 was 6 times greater than the 3.4% rise in nominal household income.  The 3.3% estimated gasoline price increase in 2012 exceeded the 2.9% estimated increase in income. 

So my question is, if we can’t raise income to offset gasoline cost increases, then why is there such a large push back on hydro-fracking of oil and gas wells, which accomplishes the following:

1. An increase in oil production;
2. A decrease in oil importation – less outflow of dollars and deficit reduction;
3. Providing high paying jobs - an increase tax revenues for the states and the U.S. Government; and
4. Moving the country towards less energy dependence.

Aren’t these good things?

Source: www.eia.gov/consumption/

NYC metro area could be the global energy showcase

My heartfelt thoughts go out to everyone in the path of Sandy.  The devastation is beyond compare and greater in areal extent than predicted.  All of the state and local agencies reacted quickly and with greater depth than anyone could have imagined.  Special thanks go out to all of the rescuers, firemen, police, individuals, families, and others too numerous to recount here.  And special praises to out to the orderliness of everyone concerned.  This is how Americans behave under adversity – exemplary. 

The next phase is finding shelter for all of these displaced people.  Families are the obvious go-to places.  Hotels will be the next go-to places.  But after that, where do people turn – families out of the metro area?  What about their jobs?  The next several weeks will be spent clearing streets of debris, pumping water out of all kinds of subway stops, commercial buildings basements, homes, etc., fixing all kinds of communications and restoring movement into and out of the metro area.  Then months and years will be spent on rebuilding homes, repairing all sorts of buildings and rebuilding the shore.

Out of all of this chaos is an opportunity to replace the old infrastructure with new infrastructure and new city plans and designs.  The East Coast has been reliant on heating oil for over a hundred years.  Now there is an opportunity to lay new natural gas lines, install solar panels on all of the new homes and buildings that will be built, install LED street lights, rebuild the communications and roads for more efficient and faster service.  Believing in human achievement and if politics can be laid aside, the metro area could become an energy efficient showcase for the world.

Energy efficient ideas:

• New natural gas lines – the natural gas utilities for the NYC/NJ/PA/Maryland and Delaware could redesign routes or establish main lines that weren’t there previously.  This would provide fuel-switching capabilities for consumers.
• New furnaces - the states and utilities should encourage the installation of the highest possible efficiency furnaces rather than the cheapest, least efficient furnaces.  This would save on natural gas or oil consumption for heating and cooling.
• New energy monitoring equipment - Hotels and homes that need rebuilding should include some of the latest technologies that monitor home energy consumption.  This would save on electricity consumption.
• LED streetlights – these tend to be expensive until economies of scale begin to take place, the electricity savings here would be excellent for local towns and cities.
• New solar panel installation - states, utilities and local authorities should extend or introduce solar panel installation incentives for the new construction of residential and commercial buildings in the metro area.  There are too many incidences where local governments have too many rules on solar panel installation.  Now is the time to streamline this process.

These are but a few ideas that could be implemented.  This is the time to turn adversity into the future.

Kodiak Oil and Gas message to US

Tuesday night, Kodiak Oil & Gas Corp. reported fourth quarter 2011 and full year 2011 financial results.  It was not the results that interested me; it was what they said.  Kodiak, in a paragraph about future expectations, described our energy policy without calling out the foibles.

I quote from the financial statement, “During the past month the quoted prices for oil coming out of the Williston Basin on pipeline (typically quoted at Clearbrook, Minn. and Guernsey, Wyo.) were substantially less than prices quoted for West Texas Intermediate.  The increase in the differential was primarily the result of significant amounts of crude oil from Canada which was competing for capacity on existing pipeline infrastructure, the down-time associated with scheduled maintenance at refineries and the expanded volumes produced in North Dakota in late 2011 and early 2012 as weather conditions were mild. North Dakota is currently producing approximately 535,000 barrels of oil per day.”

First, they addressed a pipeline issue.  They received an oil price substantially lower than prices quoted for West Texas Intermediate (actually there are two points to address here).   The increase in the differential (WTI quoted price less the price quoted for oil coming out of the Williston basin on pipeline, adjusted for delivery point) was primarily the result of significant amounts of crude from Canada, which was competing for capacity on existing pipeline infrastructure.  With production continuing to increase in Canada from oil sands production and North Dakota shale oil production, there is a pipeline capacity shortage at the current time.  While the Keystone XL will not address the capacity issue today, ceteris paribus, it will tomorrow.  Clearly, we do not have enough pipelines configured to address the shortage in that part of the country.  The second point, is that WTI is quoted at Cushing, OK.  This is the delivery point and pricing point for WTI crude.  There are storage terminals there, but definitely not enough.  When the storage reaches capacity, there is no place to put the benchmark crude, so it is priced lower and redirected through the pipeline system.  This benchmark has been compared to and priced against Brent crude from the North Sea, further exacerbating the pricing of crude in the US and ancillary hedging.  This second differential is being addressed by reversing the flow of crude from Cushing, OK to another pipeline system, by building a spur.  The President and environmentalists are fighting this.

Second, the company addressed the downtime associated with scheduled maintenance at refineries.  While this is a normal, seasonal downtime maintenance (typically maintenance is done twice a year – the first is to switch the refinery’s ability to produce winter heating oil to summer gasoline; the second occurs in the fall to switch to winter heating oil from summer gasoline), it is a bit early due to the warm winter weather.  In September 2011, ConocoPhillips shut down its refinery in Trainer, PA and Sunoco’s Marcus Hook, PA refinery was shutdown in December 2011.  These refineries shutdowns have contributed to the some tightness in the refining market.  While the general public complains about gasoline prices, they don’t think twice about paying roughly the same price for a gallon of bottled water.  The number of jobs required to bring that gallon of gasoline to us is multiples that of jobs provided by bringing the water to us.  Yet, the general public does not fight to prevent a refinery shutdown.  Without the refineries, gasoline prices would be much higher.  We can not have a choice of no refineries and low gasoline prices.  The general public wants to close refineries in general.

Third, the expanded crude oil volumes from North Dakota to 535,000 barrels of crude oil production per day contributed to the lower quoted prices out of the Williston Basin.  Thanks to new and enhanced drilling techniques of horizontal drilling and hydrofracing, production of oil and natural gas has increased substantially in the US.  Reserves of both have been added as well.  For instance, natural gas reserves in the Lower 48 States have increased from 184,106 billion cubic feet in 2004 to 263,408 billion cubic feet in 2009, according to the EIA latest data.  That is a 43% increase in reserves in 5 years because of these technologies.  North Dakota’s oil production has increased from 98,000 barrels of crude oil per day in 2005 to 310,000 barrels per day in 2010 in a 5-year period, or an increase of 216%.  That further increased to 535,000 barrels per day by January 2012.  Yet, the general public and environmentalists want to stop these practices, along with the many high paying jobs.

What is clear to me, is that the US has no clear understanding of jobs, costs, substitutes, supply and demand of all aspects of energy.  Our government, as well as the EU, found that by putting into place oil sanctions against Iran with the hope of reducing oil revenues, Iran’s life blood, that, we would force them to the negotiating table.  So far this has not happened, instead crude oil prices have rising rapidly along with gasoline prices.  This type of diplomacy was ill conceived and is creating as much hurt to the US and EU citizens, an unintended consequence, as it is to the Iranians.  To add more incompetence to this diplomatic folly, is notion of releasing oil from the Strategic Petroleum Reserves (SPR).  This is bad politics and economics.  What if we released oil from the SPR during the summer driving season (seasonally the highest price of gasoline during the year) to reduce the price of gasoline going into elections, and then Iran did something crazy like attack Israel or sink ships in the Strait of Hormuz to bloc oil shipments?  We will have released oil for political purposes and not fundamental purposes. If the above scenario happenes, the price of gasoline will easily move above $5.00 per gallon.  Then what?  How was that 2% payroll tax savings used now?