Energy demand remains huge and growing
Wanted: Investment to grow supplies.
By Tom Stundza -- Purchasing, 1/18/2007 2:00:00 AM
With the manufacturing and housing outlooks softening, analysts may have to lower energy demand expectations this year,” suggests senior analyst Phil Flynn at Alaron Trading in Chicago. But, he notes, demand’s apparent inelasticity to higher prices is confounding economists and total energy demand still will be huge. In fact, U.S. supply usually must meet demand of 99.5 quadrillion British thermal units annually. Total world consumption of marketed energy is about 425 quadrillion British thermal units.
So, “there is a lot of crude oil expansion needed both in exploration and refining,” says energy analyst Praveen Martis at Wood Mackenzie Consultants in Edinburgh, Scotland. “We may have to lower demand expectations going into the new year because of uncertain demand trends, but the overall energy supply story is far from over.” That’s because the world economy still needs lots of crude oil, natural gas, coal, nuclear and even the new biofuels to keep moving. But some of these won’t impact supply immediately. ‘’Nuclear plants, for example, are high-investment, long-gestation projects,” says Martis. “Their impact really won’t be felt until the longer term.’’
“Supply is a key influence on energy prices,” says economist Jan Stuart at UBS Securities in New York. Specifically, he says secular consumption trends emerging from China, India and other Asian nations represent rapidly growing demand for all energy types. “As transport infrastructure and electricity intensity of use grow in these regions, we expect that relatively high levels of consumption growth are likely to be sustained, resulting in higher longer-term prices, particularly in a context of constricted supply,” says Stuart.
That’s why most analysts see the need for new, immediate and large supply-side investments. “For years, ‘energy security’ was defined as the availability of adequate supplies at affordable prices, says Daniel Yergin, chairman of energy consulting firm Cambridge Energy Research Associates. “For producing countries, energy security now also means the long-term availability of customers willing to pay market prices to justify the necessary investments to bring adequate capacity on stream.” So, the recent increase in energy-related investment financing reflects confidence that enough oil and natural gas can be found to exploit today’s high prices, says Yergin, author of “The Prize,” the Pulitzer Prize-winning history of the oil industry. “This is a growth period as the industry rebounds from the contraction it went through five or six years ago,” says the Cambridge, Mass.-based energy consultant.
“It constantly is written that the world is running out of oil,” explains Yergin. “Each time—whether it was the ‘gasoline famine’ at the end of WWI or the ‘permanent shortage’ of the 1970s—advanced technology and the opening of new frontier areas have banished the specter of decline. There’s no reason to think that technology is finished this time.” A new analysis by CERA—“Why the Peak Oil Theory Falls Down: Myths, Legends, and the Future of Oil Resources”—finds that the remaining global oil resource base actually is 3.74 trillion barrels, or three times as large as the 1.2 trillion barrels estimated by the “peak oil” theorists. In fact, the global resource base of conventional and unconventional oil sources as shale is 4.82 trillion barrels and likely to grow, says Peter M. Jackson CERA’s director of oil industry activity. “Oil is too critical to the global economy,” he writes, “to allow fear of shortages to replace careful analysis about the very real challenges with delivering liquid fuels to meet the needs of growing economies.” One key issue for buyers, of course, continues to be the ability of suppliers to provide sufficient volumes at competitive prices of crude oil (including conventional downstream products), natural gas, biofuel products and some of the new unconventional products (from the Canadian oil sands, the Orinoco tar belt, oil shale reserves and the Australian and Qatar gas-to-liquids, or GTL, projects). One area of supply tightness probably won’t be natural gas since storage levels entered 2007 near the nation’s estimated maximum capacity of about 3.6 quadrillion cubic feet. Interestingly, storage and day-to-day supplies are high even though domestic production increased by less than 1.5% in 2006 and only a 0.5% growth is projected for 2007. That’s because most of the supply lines damaged by hurricanes Katrina and Rita have been restored. Also, net imports of natural gas are expected to increase again by 2.6% this year primarily due to the rise in liquefied natural gas (LNG) imports. The growing availability of supplies from liquefaction facilities in Trinidad and Tobago and Nigeria will contribute to the expected increase in LNG imports in 2007, suggests EIA.
Economy
“Manufacturers already are feeling the strain of higher energy prices in the face of slowing U.S. economic growth,” according to Mickey Levy, the New York-based chief economist for Bank of America. So, it isn’t good news for manufacturers that the potential exists for persistently high energy prices in 2007.
So, only about a quarter (26%) of chief financial executives at industrial firms believe the manufacturing sector will grow in 2007. Overall economic expansion is anticipated by a majority of these CFOs surveyed by Bank of America Business Capital, the business lending division of the nation’s largest bank. However, 35% of the CFOs at 600 mid-size and large industrial firms believe the manufacturing sector will contract this year and 39% see no growth.
“Apparently, the CFOs are reacting to slowdowns in areas such as housing and the auto industry and the high cost of energy,” says Joyce White, president of Bank of America Business Capital. That’s because 79% of the CFOs report that rising energy costs will impact their product pricing in 2007—15% expect energy costs to have a significant impact on their product pricing and 64% say the impact will be moderate.
Electricity
Since U.S. electricity consumption is forecast to increase by just 1.5% in 2007 (as compared with an annual average of 4.2% in previous years of this decade), economists are generating lower projections for electricity generation—and new plant additions. That’s a weak capital-improvements program, something that has been apparent in the electric grid system since 1960.
The nation’s electric grid is a system of synchronized power providers and consumers connected by more than 157,000 miles of transmission and distribution lines and operated by multiple control centers. In the continental U.S., the grid consists of three systems: the Eastern Interconnect, the Western Interconnect and the Texas Interconnect. Actually, the slippage in demand-growth rates began last year since residential and commercial sales rose from 2005 levels but purchasing by the industrial sector decreased.
With manufacturing expected to soften during most of this year, electrical use is projected at 3.97 trillion kilowatt hours, up from 3.9 trillion last year, the Energy Information Administration (EIA) projects total electricity generation only needs to rise to 4.18 trillion kilowatt hours this year from 4.09 trillion in 2006.
Residential electricity demand in 2006 is estimated to have increased by 0.3% over 2005 demand. Cooling degree-days in 2007 are assumed to be about 10% lower than 2006, keeping residential electricity demand growth (for air conditioning) low at a rate of 0.6%. Commercial electricity consumption follows a similar pattern with demand expected to grow a modest 1.1% in 2007 from 2.2% last year.
Unlike the recent wave of generating capacity additions, which has been almost entirely natural gas-based, future construction will feature increasing amounts of coal capacity, says analyst Xiaoyu Zheng at Global Insight.com. Coal accounts for nearly 60% of all electricity generated in the U.S. even though it decreased 0.6% in 2006. Coal consumption in the electric power sector is expected to grow by 2.1% in 2007.
| Energy supply issues keep pricing elevated
A key feature of this decade’s oil price rally has been the resilience of oil demand growth and rigidity in supply growth, says economist Jan Stuart at UBS Securities in New York. “We think oil prices have risen to historic highs not because of some bubble-type speculative trading, but because new supplies are increasingly difficult and costly to develop and produce.” That’s because: • There are fewer places to go worldwide for easy-to-add capacity; • Where companies do have access, reserves are often smaller and harder to develop (deep water, ultra heavy oil, tricky reservoirs etc). • Increasingly pronounced declining production rates in more mature oil fields; • Macroeconomic constraints (that is, too few wells, skilled people and specialty equipment of all sorts to bring online planned new production); • Geopolitical problems continue to slow new-supply developments in offshore and wilderness areas. |
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