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By Robert Rapier on Jan 14, 2013 with 4 responses

Five Energy Predictions for 2013

Normally when I list the Top 10 stories of the year, I close the post by making predictions for the upcoming year. For 2012, my predictions were:

  1. President Obama will easily win reelection, which means that energy policies will likely continue along the current trajectory.
  2. The Keystone Pipeline project will be approved (although that decision may still slide into 2013).
  3. Natural gas prices will remain low, averaging below $5/MMBTU for the year.
  4. Oil prices — both West Texas Intermediate and Brent — will average above $100/barrel in 2012.
  5. We will look back on the fact that Newt Gingrich was once the leading Republican contender for president and have a good laugh about it.

Those predictions were correct for the most part. The first and third were correct, I believe the second will ultimately be correct, the fourth was mixed (Brent averaged above $100 and WTI averaged about $94), and the 5th just depends on one’s personal opinion. In my opinion, it is correct.

However, when I listed the Top 10 Energy Stories of 2012 — as voted upon by readers — I failed to list my predictions for 2013. So here they are:

  1. Brent and WTI crude prices will both average less in 2013 than in 2012.
  2. The Brent-WTI price differential — which has widened substantially in the past two years — will narrow in 2013.
  3. The average annual price of natural gas — as measured by the Henry Hub Gulf Coast Natural Gas Spot Price — will be higher than in 2012.
  4. The Obama Administration will approve the northern leg of the Keystone XL pipeline.
  5. US oil production will continue to grow (but at a slower pace than in 2012), reaching the highest level since 1995.

The reason I believe Brent and WTI prices will fall is that I believe global oil supply is currently expanding faster than global demand is growing, and this is building up spare capacity. The oil industry is cyclical, and during this part of the cycle, increasing spare capacity leads to falling prices. I believe that we will reach a point at which spare capacity can no longer be built faster than demand increases — either because global production is in decline or demand in developing countries is simply too great — but I do not believe we have yet reached that point.

The Brent-WTI differential developed because US oil production has expanded faster in recent years than the oil could be transported to the global market. The result was a supply glut in the middle part of the US, and WTI prices falling relative to Brent prices. Substantial new pipeline capacity will come online this year to relieve some of the glut, and should narrow the differential.

I believe natural gas prices will increase because a huge number of rigs have been shifted from natural gas production to oil production. Major operators have been shutting in production. In the last half of 2012, gas prices bounced off of their lows and began to rise. I believe they will continue to do so in 2013.

In 2011, the Obama Administration had strongly signaled support for the Keystone XL pipeline expansion that would would have the capacity to carry 830,000 bpd of crude from the oil sands in Alberta and the Bakken oil fields in North Dakota. But environmentalists protested the pipeline, and since Obama was running for reelection and feared alienating his base, he punted the decision until after the election. But the US State Department issued a final Environmental Impact Statement (EIS) in late August 2011 that came down in favor of the project. Now that Obama has won a second term, I expect the project will be approved. A decision one way or another is expected this quarter.

Finally, US oil production expanded sharply in 2012. It will be hard to repeat that level of expansion in 2013, especially if oil prices soften. But I expect that the revolution of oil production in the US still has a few years to go before production begins to decline.

Link to Original Article: Five Energy Predictions for 2013

By Robert Rapier

  1. By Benjamin Cole on January 15, 2013 at 12:32 am

    Nice post. Hard to argue with any of the predictions.

    Interesting to compare RR’s tone vs, that of several years back, when the scare of Peak Oil and runaway prices was so common. Goldman Sachs and $200 a barrel (while GS had positions in the oil futures market). Oil Drum hysterics.

    Now…maybe a long-term crude glut? Who knows. So much of oil is not economics, not technology but the politics of the monkey-thug “nations” (kleptocracies) that control the stuff, as in Russia, Nigeria, Saudi Arabia, Libya, Iran, Iraq, Mexico, Venezuela…oil is curse? Maybe.

    Gotta say, when Ford introduces a production car that get 100 mpg, and it induces a national yawn (if anyone besides me even noticed) than the mood has really changed.

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    • By Thomas Willis on January 15, 2013 at 11:23 am

      “oil is curse?” We are on track to produce more oil than all of those countries. We are the top producer of NG. Its not the resources its the government.

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  2. By BakkenDispatch on January 15, 2013 at 5:11 pm

    Interesting stuff. I’ve always figured Obama would support the Keystone after his reelection, and I have no doubt that will come to pass. I’d be interested to hear your thoughts on how long U.S. oil production will continue to expand until it hits a peak. There are certainly more shale plays out there that haven’t been tapped yet, but none that compare to the Bakken, if I understand correctly.

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  3. By ben on January 17, 2013 at 11:17 am

    The relationship between energy and economic growth is a fascinating one that continues to gain traction among academics, pundits and casual observers. As we move into the year, there’s ample evidence that the economic muddling of the past half-decade continues with a distinct limp. Movement–or the modest lack thereof–of oil and gas prices of the past year point to a temporary state of affairs wherein relatively depressed global economic conditions affecting demand combine with recent increases in fossil fuel production to support relatively stable prices. The prospects that this trend will continue this year and into the next remains high. Perhaps equally important is a measure of confidence that $100+/-oil prices ensure that a range of alternative energy sources remain viable to the point of fostering greater scaling and more systemic consumer familiarity/use. As this steady progress evolves, the scaling of alternative energy ensures a measure of institutional adoption that supports a feedback loop directly impacting public policy and more permanent measures impacting resource allocation via regulatory, tax and pricing mechanisms.
    While the absence of marked increases in energy costs seeming deflate the prospects for more rapid growth of the green energy sector, the underlying reality is that a vibrant industry loosley described as bioenergy has taken root among the agro/fibre/waste processing and petro-chemical sectors who will not soon surrender their claim on a share of public resources directed toward the development of this emerging market. No example of such an “institutionalization” is more emblematic than that of the Dept. of Defense with aspirations of “greening the fleet” (or fleecing the flock, as some on the Left and Right have suggested). This is one to watch as the debate over fiscal austerity sharpens in the new session of Congress during debates on the FY 2014 federal budget and the annual appropriations process this spring and summer. Are there any prospects that sacred oxes may eventually face some goring? Perhaps. There are a few early signs that the set of dynamics that lead to the seminal Budget Reform Act (1974) a generation ago may be taking shape out on the political horizon. We might do well to keep watch for some early waves offering warnings of the eventual flood. As the Chinese blessing goes, that we should live in interesting times, indeed.
    Thanks for the contributions of the blog writers and readers in the days ahead.
    Ben

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