Professor Economides hits an energy home run at PVF Roundtable
BY MORRIS R. BESCHLOSS
PVF and economic analyst
At a record-attended meeting of the Houston-based PVF Roundtable — at which I was privileged to receive the award of Director Emeritus in February — the odds-on nation’s leading energy expert, University of Houston Professor Michael J. Economides, presented a lengthy but highly impressive state of the global energy sector, past, present and future.
A major point that he has frequently reiterated — and one I completely agree with — is that 87% of all energy usage now and in the future will be oil, natural gas and coal. And, according to Economides, the U.S.’s attraction to alternative energies is marginal at best.
The future for nuclear, which has dominated the power sourcing in France especially, could be at risk in the U.S., due to the 1979 Three Mile Island, the Ukraine’s 1986 Chernobyl disasters, and the current situation in Japan. There seems to also be no agreement as to where to store the radioactive residual.
Economides is on a tear against America’s Environmental Protection Agency, which has shown to be adamantly against the excavation of oil, whether deep sea or land-based. The EPA also been often ridiculed by China, which seems totally confounded by the disjointed direction this country is taking in energy development.
While China and India integrate a population the size of America’s people total (over 300 million) into their consumer sector this year, their 2050 outlook has led them to buy up practically all the coal produced by such leading American bituminous coal producers as Patriot Coal, Arch Coal and Peabody Energy. China is also aggressively investing in Canada’s oil-sands developers, as well as available production facilities in the Mideast, West Africa and South America.
Economides is seriously opposed to ethanol, which he believes is a scam perpetuated by the agri-business interests, and heavily subsidized by the U.S. Government. With 40% of the nation’s corn crop indentured to ethanol, global prices have shot up to new highs.
He is very critical of President Obama’s 2035 commitment that 80% of all power generation and transportation will be generated by renewable energy. He claims that most responsible energy experts believe that until the end of the 21st century, coal, oil and natural gas will still comprise the overwhelming use of energy.
With the revolutionary method of “shale fracking” now operational, he believes that the world will be awash in that fossil fuel. Economides expects natural gas prices to rise moderately higher, but nowhere near that of oil, comparatively speaking. He expects prices to reach $150 per barrel next year and stay above that level during the latter part of this decade.
Canada’s newly estimated 2 trillion oil reserve barrels could prove U.S. lifeline
A recent 60 Minutes TV documentary dwelt on Canada’s increasingly productive oil sands potential in the Athabasca region of Canada’s Alberta Province.
Although previously estimated to contain tar sand reserves, with a potential second only to Saudi Arabia’s 230 billion barrels, and ahead of Iran and Iraq in second and third place, respectively, new revelations call for a far greater potential than previously anticipated.
Surprisingly, several of the participants in the documentary, including executives from major players in the oil sands business such as Syncrude and Suncor, were extremely bullish. They opined that the ultimate reserves obtainable, utilizing current technology, and prices per barrel destined to top $100 this year, retain an ultimate potential exceeding 2 trillion barrels, which is 8 times that of the estimated oil reserves of Saudi Arabia.
Although the tar sands fields were discovered more than 25 years ago, they only become commercially viable when the price of oil topped $50 per barrel in the middle of the previous decade. The complicated separation of the oil gunk from the sand in which they were embedded reached a previous peak in 2008, when the price per barrel of oil topped $145. As oil fell to $32 per barrel in early 2009, new activity was halted, as the producers awaited a comeback in global demand as well as further cost-effective refinement of the extraction process.
With the comeback in commodity pricing generally, and oil specifically, the producers are preparing another massive expansion of their ongoing and newly-started oil extraction process activities. The vastly higher potential estimate alluded to by the “oil sands” executives takes into account the vast stretches of acreage that contain the raw material from which the oil sands are extracted.
With the extraction process compounded by the refining of oil derived from this method, the U.S. Environmental Protection Agency is looking at the oil pumped in from Canada with a jaundiced eye due to the excess carbon dioxide and greenhouse gas effluence this process generates into the Canadian atmosphere. The EPA considers effluence a global issue, no matter from where it emanates.
The concern this attitude has caused the Canadians has opened the door to the Chinese, who are financing a pipeline to Vancouver and expanded shipping facilities. They are only too happy to take over from the U.S. if and when the opportunity presents itself.
Confusing daily oil prices mislead observers
Those observers who follow the daily trend of oil prices — or even use them as a basis for making energy investments — are confused by the disparity between prices in the ICE futures exchange and the New York Mercantile Exchange, which are a source of increasing confusion.
In early February, the NYMEX crude price hovered around $88 a barrel, while the ICE-traded Brent contract pierced the $100 mark — establishing a record chasm of $13 between them. Historically, these two contracts have traded within $2 of each other.
But the major difference is that the NYMEX predominantly reflects the inventory level of the oil stock prices in the U.S. central import storage point in Cushing, Okla. These tend to represent the light sweet crude, which is easily refined into such derivatives as heating oil, jet fuel, gasoline, diesel fuel, etc., and usually emanates from such areas as Nigeria, Venezuela, the Gulf of Mexico, and lately the refined product piped in from the converted oil sands of Canada’s Alberta Province.
The ICE’s Brent contract, more reflective of the “sour crude” from the Mideast, especially Saudi Arabia, is not focused on particular supply levels such as Cushing. This makes it more reflective of the general level of global supply/demand inequities. Therefore, the huge demand emanating from the Southeast Asian quadrant, especially China, exercises an overwhelming impact on the Brent crude price structure.
Access to Cushing’s overload has given an unprecedented boost to refiners, who benefit from that Oklahoma super depot’s low cost. They can sell their finished products at prices reflecting the $100 plus Brent costs.
This state of affairs is especially confusing since the subsequent refining process on which the sour crude is dependent adds substantial additional costs to the Brent products and their eventual derivative usage. Currently, there are rumblings afoot to eliminate the NYMEX pricing, which has been the paramount structure associated with U.S. stock market reports since 1983.
Copper prices reach unexpected all-time peak
Since time immemorial, the intensity of America’s domestic construction industry had as its tell-tale barometer the price of copper. In fact, a pre-recession all-time high of $4 a pound was reached in mid-2008, just before the ignominious economic implosion, that still persists in the residential construction sector.
But after sinking to slightly over $1.20 a pound early in 2009, the red metal — which is used in everything from automobiles to communications equipment — has spiraled to a near four-time multiple, closing recently at $4.60 a pound.
With the construction-oriented copper usage, the bulk of its domestic demand, still bumping along in the doldrums, the answer to this obvious disparity is China. Also to a lesser extent are India, Indonesia, Vietnam, Taiwan and South Korea.
Although the Chinese economic miracle has been written about ad nauseam, the pace of that society’s conversion to consumerism, and its accompanying construction is legendary. To put this awesome metamorphosis in perspective, the pace of that nation’s building activity staggers the imagination.
Less than 10 years ago, a visitation by Chinese city mayors — in which I had the privilege of participating — elicited the fact that a city the size of Indianapolis (population 1 million plus) was built every three months by the Beijing-controlled economic giant.
Today, this building frenzy has escalated to a new metropolis the size of New York City (8 million) under construction every month. Much of this frenzied internal activity is a reflection of China’s governing brain trust, which is heading off internal convulsions among its teeming 1.4 billion population by upgrading its middle class and bringing its agrarian peasantry into the 21st century construction mainstream. It’s an example that should be copied by the Middle East’s Islamic chieftains.
Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.