PVF sector rides crest of energy cycle

BY MORRIS R. BESCHLOSS

PVF and economic analyst

With 52 years of involvement in the pipe-valve-fitting sector under my belt, I have never experienced a cycle more propitious to the growth and expansion of PVF manufacturers, distributors, installers, users and specifiers actively involved in this current happening.

Although historically dependent on mechanical contractor activity, chemical, petrochemical, pulp and paper, and other derivative industries, this cycle is driven by two factors -- hydrocarbon development, refining and transmission and power generation.

This alone guarantees a lengthy tenure, likely spanning many years. To amplify this conclusion, I focus on the two driving forces:

• Hydrocarbons. Although the U.S. is now dependent on two-thirds of its oil supplies from foreign sources, there are increasing opportunities for domestic development that are sure to come into play -- especially with the recognition of the biofuel failure. The discovery of the Bakken Belt oil shale, drilling in Anwar and greater offshore activity offer potential options.
• Power generation. Catch-up in power supply is even more urgent than the energy shortage. With the phony shortages and price manipulation perpetrated by Enron earlier in the decade, ongoing development projects were either put on hold or mothballed. The U.S. is now faced with an oncoming shortage that has doubled demand over supply. Although no new nuclear generators are in the cards in the near future, the current 104 stations are in the process of expanding their capacity.

With coal, America’s most prolific power resource condemned by the “Greenies,” natural gas is increasingly becoming the element of choice for our lighting, heating and air conditioning requirements. But huge domestic natural gas ‘bubbles’ in the Rocky Mountains are out of bounds because of the influence of conservationists. Further natural gas supplies await the building of liquid natural gas terminals to receive foreign ING shipments.

If there is any doubt about the energy sector’s impact on the U.S. economy, visit the Houston area, which represents 30% of the manufacturing, distribution, installation and specification aspect of the pvf sector. This geographical base is not only teeming with almost indescribable work act, but it is hard just to find unskilled workers for the many project opportunities and maintenance contracts coming down the pike.

Our industry is at the heart of the bi-polar U.S. economy that is offsetting the deep recessionary trends bedeviling housing construction and sales, automotive production shrinkage and continued disruption in the banking and overall financial sector.

PVF is also a major contributor to the unprecedented expansion of exports that have now reached 14% of our $13.5-trillion gross domestic product of goods and services.

PHC cousins. At distributor price levels, the industry as a whole is estimated to be over $75 billion, with PVF comprising one-third of that amount.

Within the next year, expect PHC to slowly make up its recent losses, while the PVF sector grows by at least 20%.

Ethanol negative reaction gathers steam

The negative reaction to the runaway ethanol expansion is finally gathering steam. Last month, 24 Republican senators -- including presidential candidate John McCain (R-Ariz.) -- demanded that the Environmental Protection Agency reverse requirements mandated by Congress in 2007 to blend more ethanol and other renewable fuels into the gasoline supply.

Sen. McCain, a previous critic of ethanol subsidies of 51 cents a bushel, led the group’s charge that these mandates were contributing substantially to global food prices.

This move is part of a growing outcry against corn-based conversion into ethanol, as global food prices are rising and in increasingly short supply.

It appears unlikely, however, that Washington will make the drastic cuts sought by critics of U.S. subsidies for corn ethanol. Any loosening of recently passed mandates for increased ethanol production would have to overcome opposition from senators representing farm states.

President Bush also reiterated his support for corn ethanol recently: “I’d much rather be paying our farmers when we go to the gas pump than paying some nation that may not like us.”

An increasing number of lawmakers are calling for loosening mandates, in the recent-passed energy law that requires an increase in the use of ethanol and other biofuels to roughly five times their current level -- to 36 billion gallons by 2022.

A sweeping farm bill under debate in the Senate also seeks to accelerate the U.S. shift away from corn-based ethanol, by proposing to reduce the current 51 cents a gallon credit to 45 cents. Another provision of the bill would create a new credit for cellulosic ethanol, made from wood chips, switchgrass and other nonfood stocks. of $1.01 a gallon. This may not be realistic, since this process is still years away from successful implementation.

While U.S. lawmakers debate the link between the rapid rise in U.S. corn-based ethanol production and the rise in food prices worldwide, several large packaged food companies are hiring lobbyists or using their internal teams to make a stronger case again the use of corn to produce ethanol.

Canadian bank: Oil prices to double by 2012

Earlier this year, I predicted crude oil prices would reach $125 per barrel at the beginning of the summer driving season, peaking at $150 before Labor Day. This was based on global usage approaching 87 million barrels a day, with new reserves barely touching 73 million during the same period annualized.

Now comes a study from the Canadian Imperial Bank of Commerce predicting $225 a barrel by 2012, as supply becomes increasingly tight. The CIBC report states that the International Energy Agency’s current oil production estimates overstate supply by about 9%, since it wrongly counts natural gas liquids -- not viable for transportation fuel- in its numbers.

Bank analyst Jeff Rubin, in his report, pointed to accelerating depletion rates, in many of the world’s largest and most mature fields. He estimates that oil production will hardly grow at all, with average daily volume between now and 2012 rising by barely a million barrels per day.

He subscribes to the ‘peak’ theory, ushering in a period of unprecedented scarcity. He attributes oil price doubling to the unprecedented oil scarcity and the competition for dwindling reserves derived therefrom.

Rubin expects that the unexpected drop off in demand by the U.S. will be more than made up by intense demand growth in developing nations. As an example, he cites the recent launch of India’s Tata automobile, which at $2500 will allow millions of households in India to own their personal vehicles.

Rubin also noted that car sales last year were up 60% in Russia, up 30% in Brazil, and up 20% in China, three of the world’s most populated nations.

Transport fuel now accounts for half of the world’s oil usage.                   

Morris R. Beschloss, a 52-year veteran of the pipe, valves and fittings industry, is pvf and economic analyst for The Wholesaler.