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Published: June 22, 2010
BP's (NYSE: BP) web site is filled
with a wide range of Gulf-spill related updates. The energy
giant is overwhelming visitors with frequent updates in a bid to
show that it is taking matters quite seriously.
Lost in all those updates, investors may have missed a fairly
important annual document that has just been released called the
"Statistical review of world energy." BP takes a fresh look at
the global oil picture every June, and they've reached some
interesting conclusions.
Efficiency Gains are Starting to Take Root
The global economic slowdown led to a hefty drop in energy
demand last year, but consumption dropped even faster in
economically developed countries in Europe and North America.
That's because the West is driving ever-smaller cars, building
large solar and wind farms, and adding more intelligence to
national electricity grids. The report notes that the "OECD
(Organization for Economic Development and Cooperation) consumed
less primary energy last year than 10 years ago, although
GDP since then has risen by 18%." Just last year, energy
demand in Europe and the United States fell by -5%.
Energy produced by wind and solar power grew by +31% and +47%,
respectively, in 2009. And we're just getting started. Total
spending on clean energy technology is expected to set a record
in 2010. As these technologies improve even more during the next
few years, the cost/benefit analysis of switching to clean
energy will become more apparent.
Notably, much of the current spending is taking place in China,
which is also the place where energy consumption is rising the
fastest. Chinese central planners have increasingly decreed that
energy-intensive export-oriented industries should receive less
government support (although those words have not yet been
matched by deeds). If China can boost its economy by +5%
annually but also increase its dependence on solar, wind and
efficiency efforts by a commensurate amount, then its net power
demand will stay flat. We're not there yet, but China's energy
requirements are starting to grow at a slower rate than its
gross domestic product (GDP).
The Gulf's Importance
While the United States has been a massive importer of oil in
recent decades, the tide has began to turn. For example, the
output from many U.S. coal mines has increasingly been shipped
abroad -- especially to China. Coal's long-term role in the
global economy remains unclear. Engineers' efforts to search for
ways to scrub carbon dioxide out of coal have proven futile, as
most approaches are proving quite costly. That said, demand for
coal remains strong -- it now accounts for 29.7% of global
energy consumption -- and
P/E ratios for coal producers remain very low.
Yet it's the Gulf of Mexico which has become the real game
changer for energy, at least here in the United States. The
estimated amount of untapped natural gas is 50% higher than 10
years ago. Despite the pain associated with the current
BP-related debacle, high output in the Gulf has sharply lowered
natural gas prices, enabling many energy-intensive firms such as
chemical makers and utilities to lower their expenses.
It's not just natural gas output that is rising: "The world's
largest increase in oil production by far came from the US,
mainly from the Gulf of Mexico," BP reports, adding that "this
is not an excuse for anything, but a piece of the reality in
which we all live." BP's analysts found that North America held
an estimated 69.5 billion barrels of oil in 1999. Even after a
decade of heavy oil production, the level of proven reserves has
actually risen to 73.3 billion barrels. In Central and South
America, proven untapped oil reserves have doubled to 199
billion barrels in the past 10 years, largely due to new
discoveries in Venezuela and Brazil.
The United States
remains the
third-largest oil
producer in the
world after Saudi
Arabia and Russia,
accounting for 8.5%
of global output in
2009. (OPEC members
still account for
77% of the world's
untapped oil
fields). Sadly, we
also accounted for
21.7% of total oil
consumption last
year. The Obama
administration's
mandate to sharply
raise fuel economy
standards should
make a dent in that
lopsided equation.
The notion that the
world is approaching
"Peak Oil" is just
not supported by the
facts. We may still
be getting closer to
a peak, but the
world has far more
untapped oil than
anyone could have
imagined 10 years
ago.
Simple Math:
Supply Exceeds
Demand
Rising oil
production and
slumping demand
yielded a
predictable result.
"Oil prices declined
for the first time
since 2001," and
fell by the largest
amount in Europe and
North America on a
percentage basis
since 1986, notes
the report. Oil
prices are up from
the start of the
year and are
unlikely to continue
that upward move
right away.
Moreover, even with
last year's
pullback, oil prices
are still three
times higher than in
2001. But over time
it is increasingly
clear that the world
has ample energy
reserves despite the
scary super-spike of
2008.
OPEC states cut
output by -7% in
2009, which is
fairly remarkable
considering the
predilection for
OPEC members to
stealthily exceed
their quotas.
Whether they
maintain that
resolve will
determine whether
oil prices stay in
their current range,
or plunge.
Major oil companies
such as Exxon
Mobil (NYSE: XOM)
and BP are no longer
the dominant energy
players. Their role
in the global energy
market has been
supplanted by the
nationalized oil
companies in places
such as Saudi
Arabia, Mexico and
Venezuela.
The publicly-traded
oil majors have been
in low-growth mode
for some time and
are best seen as
vehicles for massive
cash flow
generation. These
companies have
increasingly looked
to buy back stock or
offer juicy
dividends rather
than seek new
development
opportunities. The
fields they look to
develop are mainly
meant to replace
declining output
from existing
fields.
Action to Take
--> But a
world of stable
energy prices can
yield some real
winners. Airlines,
for example, can
better manage their
funding requirements
and are less
vulnerable to
profit-sapping price
spikes. Chemical
makers such as
Huntsman (NYSE: HUN),
which was
profiled here,
can sharply boost
their profit
spreads. Spending on
agriculture can also
rise as less fuel is
needed to run
tractors or make
fertilizer. With
more cash in their
pockets, farmers can
buy more farm needs
from the likes of
Deere (NYSE: DE)
and Monsanto
(NYSE: MON).
Most importantly,
consumers will have
more to spend on
many items if they
don't have to fill
up their tank with
$4 gas.
-- David Sterman
Staff Writer
StreetAuthority |
