Last week the U.S. Energy Information Administration (EIA) released its Annual Energy Outlook 2015 (AEO2015). The report presents updated projections for U.S. energy markets through 2040 based on six cases, defined as follows:
- Reference — Real gross domestic product (GDP) grows at an average annual rate of 2.4% from 2013 to 2040. North Sea Brent crude oil prices rise to $141/barrel (bbl) (2013 dollars) in 2040.
- Low Economic Growth — Real GDP grows at an average annual rate of 1.8% from 2013 to 2040. Other energy market assumptions are the same as in the Reference case.
- High Economic Growth — Real GDP grows at an average annual rate of 2.9% from 2013 to 2040. Other energy market assumptions are the same as in the Reference case.
- Low Oil Price — Light, sweet (Brent) crude oil prices remain around $52/bbl (2013 dollars) through 2017, and then rise slowly to $76/bbl in 2040 while OPEC increases its liquids market share from 40% in 2013 to 51% in 2040
- High Oil Price — Brent crude oil prices rise to $252/bbl (2013 dollars) in 2040 while OPEC’s market share declines to 32%.
- High Oil and Gas Resource — Estimated ultimate recovery (EUR) per shale gas, tight gas, and tight oil well is 50% higher and well spacing is 50% closer than in the Reference case. Tight oil resources are added to reflect new plays or the expansion of known tight oil plays, and the EUR for tight and shale wells increases by 1%/year more than the annual increase in the Reference case to reflect additional technology improvements. This case also includes kerogen development; undiscovered resources in the offshore Lower 48 states and Alaska; and coalbed methane and shale gas resources in Canada that are 50% higher than in the Reference case.
I have been pretty adamant — some may say stubbornly so — about my expectations for crude prices this year. I have argued against the notion that oil prices were going to fall to $20 or $30/bbl for several reasons. In a nutshell, those reasons are:
- This is well below the marginal cost of shale oil production, and you can expect shale oil supplies to begin contracting in response to falling prices
- Growing crude oil inventories will peak soon for seasonal reasons
- Lower oil prices will spur demand
I have made this argument a number of places, including in a recent Wall Street Journal article. Noted oil analyst Philip Verleger made a comment following that article that those calling for collapsing prices are correct, and he patted himself on the back with the comment “A few of us who make a living in the field did (call the price collapse correct)” while arguing that those writing for the Wall Street Journal don’t “seem to understand what is going on” and are “in the dark ages.” Them’s fighting words! CONTINUE»
While U.S. crude oil inventories have been surging since last fall, I have argued that these inventories should peak off soon. There are several reasons for this, but the primary reason is that March is historically the month that refinery utilization is at its lowest, due to the popularity of performing refinery maintenance during the month. The difference in crude oil demand from refiners between March and July has historically been about 10 million barrels per week. This alone should be enough to halt the ~8 million weekly crude oil build that we have seen thus far in 2015.
Another factor is that the large capital spending cuts that have accompanied the oil price collapse will begin to negatively impact oil production. The Energy Information Administration reported 2 weeks ago that U.S. oil production had suffered a weekly decline for the first time since January. Last week, production was almost flat, up only 18,000 bpd over the previous week. Meanwhile, U.S. refinery inputs surged by 201,000 bpd, climbing back above 90% utilization for the first time in 2 months. This should have dropped crude oil inventories by more than a million barrels for the week, but the EIA reported a huge inventory build of nearly 11 million barrels for the week.
What is the explanation for this? CONTINUE»
In my previous column – Is the U.S. Running Out of Crude Oil Storage? – I discussed the tightening crude oil storage picture in the U.S. That column has already generated the highest level of feedback and inquiries from readers and the media of any I have written in quite some time. So I want to follow up and drill down a little more, and show why this situation is more dynamic than is typically conveyed.
Since I wrote that article, there have been 2 more weeks of crude oil storage builds. Pundits continue to predict that crude oil prices have nowhere to go but down, because something has to give. Well, something is about to give. CONTINUE»
Update: See my latest article Crude Oil Inventories Should Peak Soon for an understanding of how important refinery utilization is in this picture.
No, despite the popular narrative that we keep hearing, the U.S is not running out of crude oil storage. Yet there are those who are predicting that oil prices are going to fall to $20 or $30 a barrel, pointing to the crude oil storage numbers and suggesting that we are near maximum capacity and therefore a price collapse is imminent. (Although Goldman Sachs did some backpedaling on their forecast this week).
The argument goes something like this: US running out of room to store oil; price collapse next?
“The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.”
At first glance, the argument seems to be pretty straightforward. But let’s dig into the data a bit. Admittedly, if you look at the storage numbers in the nation’s most important oil storage hub (and the price settlement point for West Texas Intermediate on the New York Mercantile Exchange) in Cushing, Oklahoma, it’s easy to form the impression that storage is filling up and an oil price crash is inevitable: CONTINUE»
I will preface this article with my standard disclaimer on the Keystone XL Pipeline project: I have no vested interest in the pipeline either way. My interest is in fostering honest debate and discussion on energy policy, and because there has been so much distortion and outright lies related to the pipeline project, I have addressed the topic from time to time.
To reiterate, I don’t think it ultimately makes much difference one way or the other whether the pipeline is built. Not to the environment and not to energy security. I think the likelihood that this oil will simply be transported to market via other means (rail, other pipelines, and/or tanker) is vastly underestimated by Keystone XL opponents. I think the U.S. and the world will use about the same amount of oil with or without it. Refineries on the Gulf Coast will continue to run heavy Venezuelan crude if it isn’t built, which is what would be backed out in favor of heavy Canadian crude if it is built. That Venezuelan crude will continue to be transported via ship, and those have been known to spill oil. I think the risks of the pipeline have been vastly overstated by people who are generally unaware of the extent of the North American oil and gas pipeline system — and consequently how low the incident frequency actually is.
That summarizes what I believe are some of the misconceptions and misleading arguments from those who are arguing against the pipeline. But don’t mistake that as me lobbying for the pipeline. I don’t think I have ever said “We need this pipeline.” I will never be at a pro-pipeline rally. For most people who care one way or another, Keystone XL is just symbolic. The impact of building it — or not — is overstated by both sides. For those who are more interested in substance and who are concerned about the growing carbon dioxide inventory in the atmosphere — it’s going to come down to whether actions around Keystone XL can be leveraged into something much, much greater.
I do understand the core of the opponents’ arguments. Behind all of the misleading and false claims, it really boils down to one thing. CONTINUE»
I tend to receive one or two guest submissions each week, most of which I pass on for various reasons. Either the submission isn’t topical enough, it has been republished multiple times elsewhere, I already have something scheduled, or it’s merely a front to generate traffic to a for-profit website that has nothing to do with energy.
This past week I received a submission that was original, well-written, and topical, although I had just published something. But I received the OK to wait until this week to publish it. The article was written by Elisabeth Wiebusch, a development consultant based out of New York who lived in Ghana for four years. She currently works on projects related to sustainability and energy in West Africa. I thought her article was educational, and because we spend most of the time talking about U.S. energy issues, I thought it would be a nice change of pace to shed light on the issues of another region of the world. So this week, Elisabeth discusses the challenges faced by Nigeria as they try to modernize their electricity grid. CONTINUE»
By now you have probably heard that a CSX (NYSE: CSX) train carrying Bakken crude from North Dakota’s shale oil fields derailed and caught fire. The oil was bound for a coastal oil shipping depot owned by the midstream Master Limited Partnership Plains All American Pipelines (NYSE: PAA) in Yorktown, Virginia. While the cause is still under investigation, the train was carrying 109 tankers of crude oil. 26 of the cars left the tracks, and several caught fire. Some reportedly ended up in a tributary of the Kanawha River.
Fortunately, there were no casualties from the accident, but one thing is certain: There will be more incidents like this, and it’s a matter of time before another incident like this happens in a more populated area. While there are safeguards in place to minimize the risks when these trains have to go through towns, the disaster in Lac-Mégantic, Quebec that claimed 47 lives emphasizes the risks of transporting flammable liquids.
Following the incident, someone asked me “Why do we transport something so dangerous via rail?” That’s a good question. Why do we do it? CONTINUE»
When I made my energy predictions for 2015, I made some very aggressive predictions. Perhaps the most aggressive was that the closing price of West Texas Intermediate would not fall below $40/barrel (bbl) in 2015. Why do I consider this a particularly aggressive prediction? Because on the day I made it, the price of WTI closed at $48.80, but in each of the previous three months the price of WTI had dropped at least $10/bbl over the course of the month. So if WTI had maintained the same downward trajectory, it could have easily ended January below $40/bbl. My prediction could have been proven wrong before we even got out of January, so I really stuck my neck out on that one.
It’s not that there is anything special about $40, and I acknowledge that it’s possible that we could overshoot. But I made the prediction to highlight my conviction that $40 oil simply isn’t a sustainable price in today’s world.
A number of respected pundits are projecting that we will go below $40/bbl, with some suggesting that crude could even crash all the way to $30/bbl. Last week on CNBC, respected oil analyst Stephen Schork said “I do think this is a dead cat bounce”, elaborating that at least over the next 2 to 3 months that there is too much oil supply relative to current demand. My point is that it has been a widely held belief that oil is going to fall below $40/bbl, so I am definitely on the wrong side of conventional wisdom on this prediction. That’s not a safe place to be, because when you are wrong in that case people think “Everyone read this correctly except for you.”
But I think conventional wisdom is wrong in this case. CONTINUE»
In the past few weeks I have received numerous questions about the role of a “drop in demand” in the oil price decline. These questions are driven by many stories in the media that have referenced a drop in demand.
There are two primary reasons given for this so-called demand drop. One is that years of high oil prices have resulted in reductions in consumption through conservation and improvements in vehicle fleet efficiency. The second reason is due to the strengthening dollar, oil has become more expensive for many countries since oil is generally traded in dollars.
There are elements of truth behind both reasons. There has indeed been reduced oil consumption in recent years in most developed regions of the world. It is also true that the dollar has strengthened against many currencies. But despite the rationale that explains this drop in oil consumption, ultimately the data must support the narrative. CONTINUE»