Future is bright for PVF market

BY MORRIS R. BESCHLOSS
PVF and economic analyst

I have never been more optimistic about the future of the pipe-valve-fittings industry, and all the components (manufacturers, wholesalers, mechanical contractors, installers, users, specifiers, etc.) that comprise it.

Don’t pay attention to the macro-economists who predict what’s going to happen this year, next year or the year after. They put the whole manufacturing sector into one big ball of wax, be it Boeing Aircraft, Caterpillar, John Deere Tractors, Harley-Davidson motorcycles, defense spending, or whatever. We tell you what goes on within the confines of the PVF sector, utilizing 51 years of experience and the hundreds of ongoing contacts we continue to expand upon.

Two years ago at the Industrial Piping Division of ASA luncheon in Orlando, I was allotted a 15-minute segment to tell the 150 or so in attendance what was going to happen. This was just between hurricanes Katrina and Rita, in September 2005. My optimism was so tangible that then-IPD president Gary Ittner, global pa for McJunkin said, “I hope he’s right.” This was in the wake of a paid macro-economist who foretold the IPD an industrial recession by mid-2007. I was wrong; I wasn’t optimistic enough.

When you think PVF, think all aspects of oil and natural gas, power generation, chemicals and paper mills, coal extraction, and shipbuilding. These sub-sectors have been red-hot and will continue to be for the foreseeable future.

If you want to know the best of the best, listen to Dr. Don McNeeley, CEO of Chicago Tube & Iron and the industry’s only full professor, who is an economics guru at the Kellogg School of Business at Northwestern University.

As the exclusive speaker at the recent ASA’s Industrial Piping Division’s breakfast, McNeeley alluded to my forecasts and analyses as the best in the business. I couldn’t hope for a greater compliment.

At the PVF Roundtable/The Wholesaler joint venture PVF Blue Ribbon Panel -- also held during the ASA Convention -- I took great pleasure in paying homage to Jim Coulas Sr., who passed away peacefully at this home on July 4. It gave me even greater pleasure to have Weldbend’s CEO, Jim Coulas Jr. introduce his son, nephew and other family members who comprise the next generation of the Weldbend family.

The panelists did themselves proud between Chicago at the Standard Club last year, and in Anaheim on October 26. The attendance at both events was well above expected attendance. This will be a permanent event during future ASA Conventions.

I am particularly thrilled with the entry of executive vice president Michael Adelizzi as top professional at ASA. As two veteran Chicagoans and University of Illinois graduates, we got off to a great start and aim to keep it that way.

Major oil crisis looms ever closer

When oil prices shot up to $100 a barrel late in October, this surprising event caught everyone by surprise, including leading oil experts gathered for an annual conference in London.

These participants were already aware that new reserves of oil were getting increasingly harder to find and more expensive to tap. Combined with years of under-investment by the energy industry, this factor has led to a shortage of new oil supplies. This problem shows no signs of abating despite rising energy demand from Asia, South America, the industrialized West, and even the Middle East itself.

Nobody expected an oil spike during the “trough,” the interval between the driving and heating seasons. Oil ministers from Qatar and the United Arab Emirates attending the conference blame the slumping dollar, widespread Wall Street speculation, and bottlenecks in the refining process.

The most remarkable unraveling of this enigma comes from Sadad al-Husseini, former executive of aramco, Saudi Arabia’s national oil company, once a consortium of seven global oil producers known as the Seven Sisters.

Al-Husseini accuses the major oil producing nations of inflating their oil reserves by over 300 billion barrels. He claims that this amount, and possibly more, “is not delineated, not accessible, and not available for production.”

A lot of production in the Middle East is from mature reservoirs, and the giant fields of the Persian Gulf region, claims al-Husseini. These are already 41% depleted al Husseini adds. His predictions become even more dire as he believes that global and oil gas capacity is constrained by crumbling reservoirs facing “a 15-year production plateau.” He predicted that supply shortages will continue to add $12 to the price of oil for every million barrels a day in required demand. Global demand, currently at 86 million barrels a day, was 10 million barrels lower in 1999.

Nobuo Tanaka, the new executive director of the Paris-based International Energy Agency, which is funded by the world’s leading industrialized consumer nations, sees little likelihood that spare capacity for oil production will increase in the near future. He points an accusing finger at so many oil-rich countries which forbid the involvement of outside investors. This impacts their technological development, as well as an independent analysis of the actual reserves available for future production.

Tanaka fears that despite today’s high prices, market tightness will increase from 2009 on because “new capacity additions won’t keep up with reduced availability from existing fields.”

Iea experts insist that a sufficient resource base exists to supply demand through 2030. But Tanaka said he isn’t confident there will be enough investment, skilled workers, and technology to get to that oil in a timely manner.

Andrew Gould, the chairman and chief executive of Schlumberger Ltd., an oil-services company, expressed similar concerns, noting that 70% of the oil fields that now quench oil demand are more than 30 years old. The growth in global demand, says Gould, is outdistancing the equivalent of the North Sea and Mexico, two of the world’s largest suppliers. To complicate the supply side issue, warns Gould, the non-OPEC supplies are “drying” up faster than even the Mideast producers.

However, Mohammed bin Dhaen al-Hamli, the United Arab Emirates’ oil minister and OPEC president, dismisses the problem to geo-political events and growing influence of financial investors.

While there was a 500,000-per-day barrel increase by OPEC as of November 1, the OPEC oil minister wouldn’t comment on additional increases. But it’s well known that OPEC members’ “cheating” had already come close to the budgeted number that OPEC committed to.

A top official at the U.S. Energy Department disputed OPEC’s claim that supply isn’t an immediate challenge. Guy Caruso, a DoE administrator, demanded more production from OPEC. He admitted that, as of now, there is practically no spare production capacity and no spare crude stocks to provide a margin of safety.

Caruso culminated his pessimistic assessment that America’s low and declining inventories, and an inadequate refining sector, can’t handle even the smaller supplies available.

What is being overlooked by all these pundits is that there could be a major demand in surge in 2008. There is practically no chance that this daily demand can be met with available supply. And whatever additional supply is to be had can only be made available with increasingly higher prices.

The stark facts are that a major energy crisis is in the making, while there is no leadership to confront this potential catastrophe head-on. If some dramatic solutions are not implemented and soon, $100 per barrel of oil could quickly become a distant memory.

Electricity demand outpaces new supply

While the energy world is obsessed with the inevitability of $100-per-barrel oil, electricity demand is fast outpacing available supply. The 10-year forecast of the North American Reliability Corporation, an electric power analyst group, disclosed that supplies were in the process of severely lagging, the supply accelerating demand. The areas most rapidly being affected are California, the Rocky Mountains, New England, Texas, Midwest and the Southeast.

This watchdog over supply/demand balance in the U.S. and parts of Canada claims that peak demand is expected to increase 18%, or about 135,000 megawatts, for the U.S. alone during the next decade.

But the amount of power available at peak times is expected to only increase 77,000 megawatts. This could be a scenario of disaster if climatic conditions become more extreme. This gap has been aggravated by the mistaken belief in oversurging after the fraud of shortages, perpetuated by Enron and others. This mothballed ongoing projects and put a halt on new developments.

Such bad news makes one nostalgic for regulation when the government would have ordered and subsidized the building of more power plants. But with the free market mechanisms increasingly in charge, the expansion of electric power is dependent on the profit motive or the vain attempt to coax people into reducing energy use.

The North American Reliability Corporation’s report warns that such an approach under the practical certainty of blackout and brownouts is not being accommodated. Neither is the emission of large quantities of gases that contribute to global warming, transmission bottlenecks, and the mass retirements of 40% of electrical engineers and shift supervisors eligible for pensions. These will create further impediments to electric generation growth.

The nation’s 10 big grid-running organizations said in a special report that 44% of the proposed new power generation in their markets is expected to come from renewable energy projects. Wind power is far ahead of all other alternatives, with a multiple of ten times the present usage anticipated, and double the amount of new capacity proposed by coal-fired generators.

The grid-power group did not foresee a problem in such an addition of so much renewable energy, but it will become a challenge because wind and solar power are intermittent resources that can’t be relied upon for around the clock energy, unlike the coal or natural gas fired plants. Much of this neglect was due to the under estimation of population growth and America’s industrial expansion, especially in the high technology arena.

The professional grid runner association, the iso/rto Council indicates that 8.6% of electricity supplies in their mostly deregulated markets come from renewable sources, primarily hydro electricity at 6.2%, and other resources such as geothermal, biomass, and solar power combined at 1.3%.

In polling its members, the group found that about 5% of total demand should come from sources they can quickly turn off. This would give customers a demand response capability, and grid operators a safety valve that can be used when supplies are tight or prices spike on alternative energy sources. The council felt that such flexibility would give at least 10% of its customers the capability of responding to power depleting emergencies.

With help from the Federal Energy Regulatory Commission, grid operators are working to strengthen this capability of responding to its customers in emergency situations. The federal agency is advocating tariffs and other regulatory mechanisms so that customers who participate in these programs will get paid market prices for their contribution. If enough customers participate in these energy-saving programs, the need for additional resources will be curbed, according to the commission.

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.