Why Make Predictions?
While there are actually other stories unfolding in the world of energy, you would never know that by my inbox. Most of the correspondence I have received in the past week is still related to oil prices, particularly following the recent huge rally in crude futures. A few readers also wanted to make sure that I noticed that one of my 2015 predictions had fallen last week. I will address that in today’s column.
For background, each year in January I make predictions for the upcoming year, and I provide the context for those predictions. (See My 2015 Energy Predictions). I have been doing this for several years, and at the end of each year I grade my predictions. As I have stated on many occasions, context around a prediction can be more important than the prediction itself. When I grade the predictions, I will talk about the context when I made each prediction, and the reasons the predictions turned out to be right or wrong.
But one reader asked why I would even attempt to make predictions given such uncertain conditions. I make predictions to set up a narrative that describes what I see unfolding in the energy sector, incorporating as much data as I can into making each prediction. While this is not an investment column, I am aware that some readers use it for investment advice. So without overtly recommending investments, I generally try to make predictions that are actionable. I will give 2 examples of that today, one of which is the prediction that failed last week. CONTINUE»
As the price of West Texas Intermediate (WTI) retests the $40 per barrel (bbl) mark, some pundits are again calling for WTI to fall to $15 or $20/bbl. The same thing happened earlier in the year when crude prices tested $40. Lots of people predicted $20, the price went to $60, and the $20 crowd went quiet for a while. Well, they are back:
“There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil — easily,” influential money manager David Kotok told CNNMoney. “I’m an old goat. I remember when oil was $3 a barrel,” said Kotok, whose clients include former New Jersey Governor Thomas Kean.
Yes, and you could get a candy bar and soda for a nickel. But I will bet him $10,000 we don’t see WTI at $15/bbl unless he has access to a time machine. Today I want to address this argument. I got into a debate on this topic with a person yesterday, and I am seeing enough of these predictions that I thought it warranted addressing. Again. The $20/bbl argument goes something like this: Crude oil inventories are extremely high. U.S. oil production keeps rising. Demand is falling. Something has to give. CONTINUE»
Last December the Energy Information Administration (EIA) released its latest estimate of U.S. Crude Oil and Natural Gas Proved Reserves. Although natural gas reserves rose, the real story was crude oil reserves. The EIA reported that U.S. proved reserves of crude oil and lease condensate had increased for the fifth year in a row, and had exceeded 36 billion barrels for the first time since 1975:
There are two reasons for this increase in proved reserves. The first is that despite >150 years of oil production in the U.S., new fields are still being discovered. In March 2015 the EIA released its update to the Top 100 U.S. Oil and Gas Fields as a supplement to the December report. This was the EIA’s first update on the Top 100 fields since 2009. The most significant addition to the list was the Eagleville field (in the Eagle Ford Shale), which was only discovered in 2009 but is now the top producing oil field in the U.S. In addition to the Eagleville, there were 4 other fields in the Top 100 that were only discovered in 2009. Several others in the Top 100 were discovered in 2007 and 2008.
But the largest additions to reserves weren’t via new discoveries at all. The largest reserves additions have been a result of rising oil prices, and this is a source of frequent misunderstanding on the topic on reserves. CONTINUE»
According to the recently-released BP (NYSE: BP) Statistical Review of World Energy 2014, the U.S. was the world’s largest and most diverse energy producer in 2014. The Statistical Review ranked the U.S.:
- #1 in oil production
- #1 in natural gas production
- #1 in nuclear power
- #1 in wind power
- #1 in geothermal power
- #1 in biofuels
- #2 in coal production
- #4 in hydropower
- #5 in solar power
The U.S. is clearly an energy production superpower, but we are an even greater energy consumer. Thus, despite the large amount of energy production, the U.S. is not energy independent. Our position as the #2 coal producer behind China (not coincidentally) mirrors our #2 position behind China in carbon dioxide emissions. And despite the rapid growth of renewable energy in both countries, carbon dioxide emissions in both countries rose in 2014 (to a new all-time record for China). CONTINUE»
Given the amount of air time the crude oil storage situation received back in March and April, this might be a good time to revisit that situation. If you recall, there was a great amount of hand-wringing regarding the crude oil storage picture in the U.S. Inventories were high and they were continuing to rise. There were a great many articles like this one, which assured us the situation was dire: 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.”
In last month’s article Where are the Unicorns?, I discussed the fact that the commercial cellulosic ethanol plants that were announced with great fanfare over the past couple of years are obviously running at a small fraction of their nameplate capacity. In fact, April was a record month for cellulosic ethanol production according to the EPA’s database that tracks this information, but that meant that at least 8 months into the learning curves for these plants actual production for that month was only about 6% of nameplate capacity.
May’s numbers are now in, and the situation has gotten worse. After reporting 288,685 gallons of cellulosic ethanol in April, May’s numbers only amounted to 114,018 gallons. This is only about 2.4% of the nameplate capacity of the announced commercial cellulosic ethanol plants. If we use year-to-date numbers, the annualized capacity is still less than 3% of nameplate capacity for facilities that cost hundreds of millions of dollars to build. Let that soak in. POET alone spent $275 million, with U.S. taxpayers footing more than $100 million of that bill. Abengoa reportedly received $229 million from taxpayers for its project. For this (plus however much that was spent by INEOS), the combined plants are running at an annualized capacity of 1.7 million gallons of ethanol, which would sell on the spot market today for $2.6 million. CONTINUE»
The OPEC Free Fall
There is a popular narrative going around that I want to address in today’s article. Last November, after several months of plummeting crude oil prices, the Organization of the Petroleum Exporting Countries (OPEC) met to discuss the oil production quotas for each country in the months ahead. Many expected OPEC to cut production in order to shore up crude prices that had been falling since summer. This was the strategy favored by OPEC’s poorer members, as many require oil prices at $100/barrel (bbl) in order to balance government budgets.
Instead, OPEC announced that they would continue pumping at the same rate. They chose to defend market share against the surge of supply from U.S. shale producers, and in doing so the fall in the price of crude oil accelerated. A look at the U.S. rig count shows the swift impact to U.S. shale drillers in the aftermath of that meeting:
Congress Mandates Cellulosic Ethanol and The EPA Tracks It
The U.S. Environmental Protection Agency (EPA) is tasked with tracking compliance under the Renewable Fuel Standard (RFS2) that was set in the Energy Independence and Security Act of 2007 (EISA). Obligated parties under the RFS2 must demonstrate compliance with Renewable Identification Numbers (RINs), which the EPA created to track RFS2 compliance. A RIN is a 38-character number assigned to a gallon equivalent of renewable fuel produced or imported. For corn ethanol, 1 gallon of ethanol produced generates 1 RIN. Other kinds of biofuel generates RINs at different rates which are defined by the EPA. For certain gaseous biofuels, such as di-methyl-ether (DME) and bio-methane (methane typically produced from sewage sludge or manure), the EPA has specified that 77,000 British thermal units (BTUs) of fuel are 1 gallon of renewable fuel equivalent. Not coincidentally, this is the energy content of 1 gallon of ethanol.
Obligated parties that produce or own RINs must register with the EPA, and RIN generation and transaction data is available from the EPA Moderated Transaction System (EMTS). A RIN is attached to each gallon of renewable fuel (or equivalent) as it is transferred to a fuel blender. After blending, RINs are separated from the blended gallon and are used by obligated parties (blenders, refiners, or importers) as proof that they have sold renewable fuels to meet their RFS mandated volumes. An obligated party can purchase RINs to satisfy their obligations, and that’s exactly what many obligated parties do. CONTINUE»
Occasionally I am deluged with inquiries about a particular news story. That happened this week. As the inquiries mounted, I decided I better address the story. After I saw one more gushing, uncritical report on CNN, I knew a reality check was in order.
This week German car manufacturer Audi announced they can economically produce carbon-neutral automotive fuel from ingredients found in the atmosphere:
That article’s subtitle is “Carbon-neutral diesel is now a reality.” The article explains:
German car manufacturer Audi has reportedly invented a carbon-neutral diesel fuel, made solely from water, carbon dioxide and renewable energy sources. And the crystal clear ‘e-diesel’ is already being used to power the Audi A8 owned by the country’s Federal Minister of Education and Research, Johanna Wanka.
There is also an explanatory graphic that goes along with the story, and that’s where a few people might begin to ask some critical questions about this process: CONTINUE»
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.