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A 65-mile stretch of the Mississippi near New Orleans remained closed Monday after two vessels collided and caused an oil spill on Saturday in foggy conditions about 30 miles west of New Orleans. As NBC news reports, the Lindsay Ann Erickson crashed with the Hannah C. Settoon, which was pushing two barges carrying barrels of light crude oil that spilled into the river. Clean-up efforts are underway.
In this aerial photo, river traffic is halted along the Mississippi River between New Orleans and Vacherie, La., due to a barge leaking oil in St. James Parish, La., Sunday, Feb. 23, 2014. The collision happened Saturday afternoon near Vacherie.
The U.S. Coast Guard said the source of an oil spill was secured but 65 miles of the Mississippi River including the Port of New Orleans remained closed Sunday.
The Coast Guard said in a news release the oil spill occurred Saturday when a barge collided with another vessel near Vacherie, between New Orleans and Baton Rouge.
“Lightering operations on the damaged barge concluded early Sunday morning and the source of the spill was secured,” the release said. “Oil spill response vessels and recovery equipment are deployed in the river.”
The Coast Guard said the Captain of the Port closed the river from mile marker 90 to mile maker 155 “to avoid possible contamination of passing vessels and to reduce the amount of oil spreading further down the river.”
A unified command including the Coast Guard, the Louisiana Oil Spill Coordinator’s Office, the environmental cleanup company ES&H and the Louisiana Department of Environmental Quality was cooperating on the response to the spill, the Coast Guard said.
It may not be one of the core three (somewhat) realistic and accurate econometric indicators of China’s economy (which as a reminder according to premier Li Keqiang are electricity consumption, rail cargo volume and bank lending), but when it comes to getting a sense of capacity bottlenecks in China’s fixed investment pipeline – be it in ghost cities or the latest skyscraper building spree – nothing is quite as handy as commodity, and particularly iron ore (if not copper, which as we have explained before has a far more “monetary/letter of credit” function in China’s markets), stockpiles at China’s major ports. The logic is simple: no stockpiles means end demand by steelmakers is brisk and there is no inventory build up which in turns keep Australia, Brazil and other emerging markets happy. Alternatively, large stockpiles indicates something is very wrong with final demand, and hence, the overall economy.
One look at the chart below, which shows how much iron ore has been stockpiled at China’s 34 major ports (spoiler alert: it just hit an all time high), should explain at which of these two extremes China currently finds itself.
Here is what happened as explained by Market News:
Weak demand from steelmakers saw iron ore stockpiles at major ports hitting record highs, according to data from industry website umetal.com. Iron ore inventory at China’s 34 major ports jumped 4.56 million tons last week to 100.86 million tons as of February 14, the 2nd time it has surpassed the 100 million-ton level and matching the record of 2012. Iron ore imports were also at a record high in January, at 86.83 million tons, as steel traders boosted imports to bet on rising steel prices this year. But data from the China Iron and Steel Association showed crude steel output falling around 2% m/m in January. Average steel prices fell 0.79% last week, according to data compiled by mysteel.com.
There is another, more finely spun, explanation: monetary financing, or in other words, when it comes to China’s peculiar “generally accepted collateral”, iron is the new copper. Bloomberg explains:
Iron ore stockpiles in China, the world’s biggest buyer, climbed to a record as traders increased imports to use the steel-making raw material as collateral for credit and domestic demand remained weak.
“Imports kept piling up at ports as more cargoes are being hauled in for trade-financing deals,” Gao Bo, chief iron ore analyst at Mysteel.com, a researcher in Shanghai, said by phone from Beijing today.
While this may suggest end demand has not completely imploded, it does bring up a different set of complications: steel mill funding difficulties – perhaps the most sore topic in China nowadays.
Steel mills and trading firms in China are contending with increasing difficulty in getting funding, said Mysteel’s Gao.
“The funding situation in the steel industry was getting worse last month,” he said.
The weighted average lending rate in China was 7.2 percent in December, up from 6.22 percent a year earlier, central bank data released earlier this month show. In December, 63.4 percent of loans had interest rates above benchmarks, up from 59.7 percent a year earlier, according to the central bank.
However one spins it though, there is no denying that in addition to its on again, off again infautation with tapering and deleveraging, which usually continues right until the moment yet another shadow bank has to be bailed out, construction in China has slammed on the brakes:
Stockpiles of steel products also rose as construction activity remained weak after the Lunar New Year holidays, Gao said. Traders’ stockpiles of rebar, a building material, jumped by 65 percent this year to 8.55 million tons last week, according to Shanghai Steelhome.
One thing is certain – the biggest loser, as iron prices are set to tumble, will be Australia
Prices may average $119 a ton this quarter, $110 in second quarter and drop to $100 in the final period of this year, Goldman Sachs analysts led by Christian Lelong said in the Feb. 11 report.
Mine supply of iron ore reached a record over the fourth quarter of 2013, “with the natural destination being China,” Macquarie Group Ltd. said in a Feb. 13 report. “With inventory build being evidenced on the back of higher imports, this will act as a buffer to buyers in the coming months,” it said.
China’s shipments from Australia’s Port Hedland, the largest ore-export terminal, rose 27 percent to 23.3 million tons last month. Increased supply from Australia, the top ore shipper, may push the global seaborne surplus to 94.2 million tons this year from 9.1 million tons in 2013, UBS AG estimates.
Rio Tinto Group (RIO), the world’s second-biggest exporter, said last month that output rose 7 percent to 55.5 million tons last quarter from 52 million tons a year earlier. Fortescue Metals Group Ltd. is boosting capacity to 155 million tons by the end of March.
And speaking of Australian iron miners, it was in late summer of 2012 when Chinese iron ore stockpiles were once again in the 100 million ton range, when iron prices crashed so bad, that Fortescue was on insolvency watch. Should the current episode of collapsing Chinese end demand persist and construction freeze persist, it may be time to short to FMGAU bonds once again.
Unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation – neither Developing nor Emerging – will dare deviate from the current status quo course of unsustainable, superglued house of cards “muddle-through” until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand.
Submitted by James Stafford via OilPrice.com,
The potential for a golden age of gas comes along with a big “if” regarding environmental and social impact. The International Energy Agency (IEA)—the “global energy authority”–believes that this age of gas can be golden, and that unconventional gas can be produced in an environmentally acceptable way.
In an exclusive interview with Oilprice.com, IEA Executive Director Maria van der Hoeven, discusses:
- The potential for a golden age of gas
- What will the “age” means for renewables
- What it means for humanity
- The challenges of renewable investment and technology
- How the US shale boom is reshaping the global economy
- Nuclear’s contribution to energy security
- What is holding back Europe’s energy markets
- The next big shale venues beyond 2020
- The reality behind “fire ice”
- Condensate and the crude export ban
- The most critical energy issue facing the world today
Interview by. James Stafford of Oilprice.com
Oilprice.com: In 2011, the IEA predicted what it called “the golden age of gas,” with gas production rising 50% over the next 25 years. What does this “golden age” mean for coal, oil and nuclear energy—and for renewables? What does it mean for humanity in terms of carbon emissions? Is the natural gas boom lessening the sense of urgency to work towards renewable energy solutions?
IEA: We didn’t predict a golden age of gas in 2011, we merely asked a pertinent question: namely, are we entering a golden age of gas? And we found that the potential for such a golden age certainly exists, especially given the scale of unconventional gas resources and the advances in technology that allow their extraction. But the potential for a golden age of gas hinges on a big “if,” and we elaborated on this in 2012 in a report called “Golden Rules for a Golden Age of Gas”. Exploiting the world’s vast resources of unconventional natural gas holds the key to golden age of gas, we said, but for that to happen, governments, industry and other stakeholders must work together to address legitimate public concerns about the associated environmental and social impacts. Fortunately, we believe that unconventional gas can be produced in an environmentally acceptable way.
Under the central scenario of the World Energy Outlook-2013, natural gas production rises to 4.98 trillion cubic metres (tcm) in 2035, up nearly 50 percent from 3.38 tcm in 2011. But we have always said that a golden age of gas does not necessarily imply a golden age for humanity, or for our climate. An expansion of gas use alone is no panacea for climate change. While natural gas is the cleanest fossil fuel, it is still a fossil fuel. As we have seen in the United States, the drastic increase in shale gas production has caused coal’s share of electricity generation to slide. Of course, there is also the possibility that increased use of gas could muscle out low-carbon fuels, such as renewables and nuclear, from the energy mix.
OP: When will we see “the golden age of renewables”?
IEA: Although we have not yet predicted a “golden age” of renewables, the current, rapid growth of renewable power is a bright spot in an otherwise bleak picture of global progress towards a cleaner and more diversified energy mix. Still, the investment case for capital-intensive, low carbon power technologies carries challenges. We need to distinguish between two situations:
• In emerging economies, renewable power often provides a cost-competitive alternative to new fossil based generation and are perceived as part of the solution to questions of energy supply, diversification, and economic development. In China, for example, efforts to reduce local pollution are stimulating major investments in cleaner energy.
• By contrast, in stable systems with sluggish demand, no technology is competitive with marginal electricity prices, due to overcapacity. Governments are nervous about increasing investment in low-carbon options which impact on consumer prices, and this is causing policy uncertainty. But long term energy security and environmental goals need to be kept in mind.
The overall outlook for renewable electricity remains positive, even as the outlook can vary strongly by market and region. However, the electricity sector comprises less than 20% of total final energy consumption. The growth of renewables in other sectors such as transport and heat has been more sluggish. For a golden age of renewables to materialise, greater progress is needed in these areas, for example, with the development of advanced biofuels and more policy frameworks for renewable heat.
OP: How is the shale boom reshaping the global financial and economic system? Who are the winners and losers in this emerging scenario?
IEA: One of the key messages of our World Energy Outlook-2013 is that lower energy prices in the United States mean that it is well-placed to reap an economic advantage, while higher costs for energy-intensive industries in Europe and Japan are set to be a heavy burden.
Natural gas prices have fallen sharply in the United States – mainly as a result of the shale gas boom – and today they are about three times lower than in Europe and five times lower than in Japan. Electricity price differentials are also large, with Japanese and European industrial consumers paying on average more than twice as much for electricity as their counterparts in the United States, and even Chinese industry paying almost double the US level.
Looking to the future, the WEO found that the United States sees its share of global exports of energy-intensive goods slightly increase to 2035, providing the clearest indication of the link between relatively low energy prices and the industrial outlook. By contrast, the European Union and Japan see their share of global exports decline – a combined loss of around one-third of their current share.
OP: The IEA has noted that the US is no longer so dependent on Canadian oil and gas. What could this mean for pending approval of TransCanada’s Keystone XL pipeline? How important is Keystone XL to the US as opposed to its importance for Canada?
IEA: The decision on the Keystone matter is one that must be taken by the United States Government. I am afraid it is not for the IEA to comment.
OP: With the nuclear issue taking center stage in Japan’s election atmosphere, is Japan ready to pull the plug entirely on nuclear, or is it too soon for that?
IEA: This year’s World Energy Outlook, which we will release in November 2014, will carry a special focus on nuclear energy, so please stay tuned. While I won’t discuss what Japan should do, I will say that every country has a sovereign right to decide on the role of nuclear power in its energy mix. Nevertheless, nuclear is one of the world’s largest sources of low-carbon energy, and as such, it has made and should continue to make an important contribution to energy security and sustainability.
A country’s decision to cut the share of nuclear in its energy mix could open up new opportunities for renewables, particularly as some phase-out plans envision the replacement of nuclear capacity largely with renewable energy sources. However, such a decision would also likely lead to higher demand for gas and coal, higher electricity prices, increased import dependency on fossil fuels and electricity, and a more difficult path towards decarbonisation. Such a scenario would therefore make it much more difficult for the world to meet the 2°C climate stabilisation goal, and have potentially negative impacts on energy security.
OP: What is the key factor holding back European energy markets?
IEA: Europe has quite a few advantages but also many hurdles to overcome. If I had to pick one key factor that is holding back European energy markets, I would say it is the lack of cross-border interconnections. Let me explain what I mean. As we showed in WEO 2013, Europe’s competitiveness is under pressure, as energy price differences grow between Europe and its major trading partners – the US, China and Russia. High oil and gas import prices combined with low gas and electricity demand, following the recession, are impacting European economies.
Europe should accelerate the use of its indigenous potential and reap the social and economic benefits from energy efficiency, renewable energies and unconventional oil and gas. In open economies, there are significant advantages to be gained from free trade and a large energy market. One example: Today, we cannot make use of competitive electricity prices across the EU, as physical trade barriers exist and markets remain national. Europe is failing to achieve its potential. The electricity grid and system integration is very low, which also serves as a barrier to the full and efficient exploitation of renewable energy potentials. This is why addressing the issue of cross-border interconnections is so important.
OP: Where do you foresee the next “shale boom”?
IEA: According to WEO projections, there will be little non-North American shale development before 2020 due to the much earlier stage of exploration and the time needed to build up the oil field service value chain. Beyond 2020, we project large-scale shale gas production in China, Argentina, Australia as well as significant light tight oil production in Russia. The current reform proposals in Mexico have the potential to put Mexico on the top of that list as well, but they need to be properly implemented.
OP: What is the realistic future of methane hydrates, or “fire ice”?
IEA: Methane hydrates may offer a means of further increasing the supply of natural gas. However, producing gas from methane hydrates poses huge technological challenges, and the relevant extraction technology is in its infancy. Both in Canada and Japan the first test drillings have taken place, and the Japanese government is aiming to achieve commercial production in 10 to 15 years.
One thing I always mention when I am asked about methane hydrates is this: It may seem far off and uncertain, but keep in mind that shale gas was in the same position 10 to 15 years ago. So we cannot rule out that new energy revolutions may take place through technological developments and price incentives.
OP: Have we hit the “crude wall” in the US, the point at which oil production growth may end up slowing due to infrastructure and regulatory constraints?
IEA: In January 2013, the IEA’s Oil Market Report examined the possibility that as surging production continues to move the US closer to becoming a net oil exporter, there may come a time when various regulations, particularly the US ban on exports of crude oil to countries other than Canada, could have an adverse impact on continued investment in LTO – and thus continued growth in production. We called this point the “crude wall”.
A year later, in our January 2014 Oil Market Report, we noted that with US crude oil production exceeding even the boldest of expectations in 2013 by a wide margin, the crude wall now seems to be looming larger than ever. Having said that, challenges to US production growth are not imminent. Potential US growth in 2014 seems a given, even against the backdrop of resurgent non-OPEC supply growth outside North America.
OP: How is this shaping the crude export debate and where do you foresee this debate leading by the end of this year?
IEA: You are better off asking my friends and colleagues in Washington! This is obviously a sensitive topic. Different people feel differently about it, often very strongly. Oil policy always is the product of multiple, sometimes-competing considerations.
OP: What would lifting the ban on crude exports mean for US refiners, and for the US economy?
IEA: Many refiners and other major oil consumers have said they support keeping the ban amid worries that allowing exports would result in higher feedstock costs and erode their competitive advantage, or shift value-added industry abroad. On the other hand, oil producers have in general come out in favour of lifting the ban, arguing that the “crude wall” may become so large that it cannot be overcome; they see the possibility of a glut causing prices to slump and thereby choking off production. We have not produced any detailed analysis on the economic impact of lifting the ban, so I cannot comment on that part of your question.
OP: Are there any other ways around the “crude wall” aside from lifting the export ban?
IEA: As we wrote in our January 2014 Oil Market Report, much of the LTO is produced in the form of lease condensate, which is most optimally processed in a condensate splitter. There is currently only one such facility in the United States, although at least five others are in various stages of planning and construction.
I mention this issue because one could imagine a scenario under which lease condensate is excluded from the crude export restriction. The US Department of Commerce, which enforces the export ban, includes lease condensates in the definition of crude oil. However, this definition could be changed, or the Commerce Department could simply issue lease condensate export licenses at the behest of the President.
OP: How will the six-month agreement to ease sanctions on Iran affect Iranian oil production? And if international sanctions are indeed lifted after this “trial period”, how long will it take Iran to affect a real increase in production?
IEA: The deal between P5+1 and Iran doesn’t change the oil sanctions themselves. The oil sanctions remain fully in place though the P5+1 agreed not to tighten them further. Relaxing insurance sanctions doesn’t mean more oil in the market.
As for the second part of your question, I am afraid I can’t answer hypotheticals and what-ifs.
OP: What is the single most critical energy issue in the US this year?
IEA: I think that if you take the view that the energy-policy decisions you make now have ramifications for many decades to come, and if you believe what scientists tell us about the climate consequences of our energy consumption, then the single most critical energy issue in the US is the same issue for every country: what are you going to do with your energy policy to mitigate the risk of climate change? Energy is responsible for two-thirds of greenhouse-gas emissions, and right now these emissions are on track to cause global temperatures to rise between 3.6 degrees C and 5.3 degrees C. If we stay on our present emissions pathway, we are not going to come close to achieving the globally agreed target of limiting the rise in temperatures to 2 degrees C; we are instead going to have a catastrophe. So energy clearly has to be part of the climate solution – both in the short- and long-term.
OP: What is the IEA’s role in shaping critical energy issues globally and how can its influence be described, politically and intellectually?
IEA: Founded in response to the 1973/4 oil crisis, the IEA was initially meant to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets.
While this continues to be a key aspect of our work, the IEA has evolved and expanded over the last 40 years. I like to think of the IEA today as the global energy authority. We are at the heart of global dialogue on energy, providing authoritative statistics, analysis and recommendations. This applies both to our member countries as well as to the key emerging economies that are driving most of the growth in energy demand – and with whom we cooperate on an increasingly active basis.
Whether driven by real supply-demand issues, concerns over terrorism (sparked by the Sochi plane debacle), or hopes a renewed un-tapered QE on the basis of 2 piss-poor jobs reports in a row is unclear. What is clear is that WTI crude is having its best day in over 2 months – now at its highest in 2014, back above $100 a barrel and its most expensive in history for this time of year.
2014 highs, biggest jump in 2 months, back over $100 per barrel
and the most expensive barrel of oil for this time of year in history…
Last week the U.S. Senate’s Energy Committee held the first hearing in decades on the question of whether exporting US crude oil, prohibited by law since the 1970s, should be allowed again. Attendees heard proponents say that allowing crude exports would hold prices down with opponents claiming the opposite case.
To be clear, these would not be net crude oil exports. Of the 19+ million barrels a day that we consume at present, we import roughly 7.5 million barrels of crude per day and export roughly 2.5 million b/day of petroleum products (diesel and propane, for example). And even the US EIA admits we’ll be importing millions of barrels of crude oil for decades, in fact indefinitely.
So this is really an intramural fight: US oil producers want to be able to export while refiners and most users want to keep the crude at home. As Senator Ron Wyden, Chairman of the Energy Committee, said in his remarks, don’t expect this argument to be resolved quickly.
Here’s a related thought experiment. It involves the UK crude oil situation between 1980 and today, shown in Figure 1 below. After joining the exclusive club of Top 20 world oil producers in 1978, two years later the UK’s oil producers joined the ranks of oil exporters. Over the next 25 years they exported roughly ¼ of their total oil production, earning around $20+ per barrel most of those years. But after production peaked in 1999, within six years the UK was back to importing oil, at an average price approaching $100 a barrel. Imports have grown back to ½ million b/d, which is 1/3 of total consumption.
My question to the Brits: if you could turn the clock back, would you allow all your oil to be produced at the maximum possible rate, earning the amount of export dollars you did, if it meant that within a generation you would be back to being an oil importer paying roughly five times as much per barrel? In other words, how did the buy-high sell-low plan work for you? And were those exports in your best long-term national interests? Didn’t think so…
There are almost as many differences as there are parallels between the UK and US circumstances. But they share a bottom-line question: is it in the USA’s best long-term national interests to produce unconventional shale oil sufficiently fast that we end up exporting some of it overseas? Didn’t think so…
Fig. 1: The UK exported oil for 25 years from 1980 through 2005, shown above as the amount produced above the consumption line. Exports peaked at 1.2 million barrels a day in 1999, the same year that production peaked at 2.93 million b/d. imported roughly a half-million b/d in Data is from BP (2013).
Steve Andrews is a former energy consultant and a contributing editor for Peak Oil Review.
Armed tribesmen bombed Yemen’s main oil pipeline on Saturday, halting crude flow to the country’s main export terminal less than a month after it was repaired, oil and local officials said.
The attack occurred in the Serwah district in the central oil-producing province of Maarib, they said, and caused a huge fire that prompted the closure of the pipeline and stopped oil flow from the Maarib fields to the Ras Isa oil terminal on the Red Sea.
Yemen, which relies on crude exports to finance up to 70 percent of its budget, has suffered frequent bombings of its main pipeline in recent years. The last one took place on Dec. 26 and the pipeline was repaired on Jan. 5.
Disgruntled tribesmen stage these attacks to pressure the government to provide jobs, settle land disputes or free relatives from prison.
Such lawlessness is a global concern, particularly for the United States and its Gulf Arab allies, because of Yemen’s strategic position next to oil exporter Saudi Arabia and to main shipping lanes.
Yemen is also home to one of al Qaeda’s most active wings.
Before a spate of attacks that began in 2011, the 270-mile Maarib pipeline carried around 110,000 barrels per day to Ras Isa.
Something has bothered me of late: why is the price of crude oil still elevated? Other commodities have taken a battering since 2011. Gold, copper and iron ore – all are way down off their peaks. But oil has seemingly defied gravity. And that’s despite increased supply from shale oil in the U.S., still soft demand particularly in the developed world and declining rates of inflation growth across the globe.
What gives? Well, shale oil proponents will say falling oil prices are just a matter of time. And that the boom in shale oil will reduce U.S. reliance on foreign oil, leading to cheaper local oil, which will free up household budgets and spur consumption as well as the broader economy. Perhaps … though I’d have thought all of that would be already reflected in prices.
On the other side, you have “peak oil” supporters who suggest high oil prices are perfectly natural when oil production has peaked, or at least the good stuff has disappeared. Yet the boom in U.S. shale oil appears to put at least a partial dent in this thesis.
There may be a better explanation, however. It comes from UK sell-side analyst, Tim Morgan, in an important new book called Life After Growth. In it, he suggests that the era of cheap energy is over. That the new unconventional forms of oil are far less efficient than old ones, meaning they require significant amounts of energy to produce. In effect, the energy production versus energy cost of extraction equation is rapidly deteriorating.
Morgan goes a step further though. He says cheap energy has been central to the extraordinary economic growth generated since the Industrial Revolution. And without that cheap energy, future growth will be permanently impaired.
It’s a bold view that’s solidified my own thinking that higher energy prices are here to stay. And the link between cheap energy and economic growth is fascinating and worth exploring further today. Particularly given the implications for the world’s fastest-growing and most energy-intensive region, Asia.
Real vs money economy
First off, a thank you to Bob Moriarty of 321gold for tipping me off to Morgan’s work in this well-written article. Morgan’s book is worth getting but if you want the skinny version, you can find it here.
Morgan begins his book outlining four key challenges facing economies today:
- The biggest debt bubble in history
- A disastrous experiment with globalisation
- The massaging of data to the point where economic trends are obscured
- The approach of an energy-returns cliff edge
The first three points aren’t telling us much new so we’re going to focus on the final one.
Here, Morgan makes a key distinction between what he terms the money economy and the real economy. He suggests economists around the world have got it all wrong by focusing on money as the key driver of economies.
Instead, money is the language rather than the substance of the real economy. The real economy is a surplus energy equation, not a monetary one, and economic growth as well as the increase in population since 1750 has resulted from the harnessing of ever-greater quantities of energy.
In fact, society and economies began when agriculture created surplus energy. Before agriculture, in the hunter-gatherer era, there was an energy balance where the energy which people derived from food was largely equivalent to the energy that they expended in finding the food.
Agriculture changed that equation. It allowed for the creation of surplus energy. In essence, three people could be supported by the labor of two people, allowing one person to engage in non-subsistence activities. This person could make better agricultural tools, build bridges for better infrastructure and so on. In economic parlance, this person didn’t have to concentrate on products for immediate consumption but rather the creation of capital goods. The surplus energy equation allowed for that.
The second key development was the invention of the heat engine by Scottish engineer James Watts in 1769, although a more efficient version was produced later in 1799. This invention allowed society to access vast energy resources contained in oil, natural gas, coal and so forth. In other words, the industrial revolution allowed the harnessing of more energy to apply vast leverage to the economy.
In sum, the modern economy is the story of how society overcame the limitations of the energy equation. Or as Morgan puts it: “…all goods and services on which money can be spent are the products of energy inputs, either past, present or future.”
The creation of surplus energy during the Industrial Revolution and subsequent explosion in economic and population growth isn’t an accident. They’re tied at the hip.
Understanding the distinction between the money economy and the real economy can also help us better understand debt. Debt is a claim on future energy. The ability of indebted governments to meet their debt commitments will partially depend on whether the real (energy) economy is large enough to make this possible.
Era of cheap energy is over
Morgan goes on to say that the era of surplus energy, which has driven economic growth since 1750, is over. The key isn’t to be found in the theories of “peak oil” proponents and the potential for absolute declines in oil reserves. Instead, it’s to be found in the relationship between the energy extracted versus the energy consumed in the extraction process, also known as the Energy Return on Energy Invested (EROEI) equation.
The equation maths aren’t difficult to understand. If the EROEI is 10:1, it means that 10 units are extracted for every 1 unit invested in the extraction process.
From 1750-1950, the EROEI of oil discoveries was very high. For instance, discoveries in the 1930s had 100:1 EROEIs. That ratio declined to 30:1 by the 1970s. Today, that ratio is at about 17:1 with few recent discoveries above 10:1.
Morgan’s research suggests that going from EROEIs of 80:1 to 20:1 isn’t disruptive. But once the ratio gets below 15:1, energy becomes a lot more expensive. He suggests the ratio will decline to 11:1 by 2020 and the cost of energy will increase by 50% as a consequence.
Non-conventional sources of oil will provide little respite. Shale oil and gas have EROEIs of 5:1 while tar sands and biofuels are even lower at 3:1. In other words, policymakers who pin their hopes on shale oil reducing energy prices are seriously deluded.
And further technological breakthroughs to better locate and extract oil are unlikely to help either. That’s because technology uses energy rather than creates it. It won’t change the energy equation.
While some unconventional sources offer hope, such as concentrated solar power, they won’t be enough to offset surplus energy turning to a more balanced equation.
Oeuvre to growth tool
If the real economy is energy and the days of surplus energy are coming to an end, then so too is economic growth, according to Morgan. In his own words:
“…the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.”
This terribly pessimistic conclusion requires some further explanation. Morgan explains the link between energy and the economy thus. If your EROEI sharply declines, it means more energy is needed for extraction purposes and less energy is available to the economy. Ultimately, this results in the cost of energy rising as a proportion of GDP, leaving less value for other things. Put another way, with the leverage from surplus energy diminished, there’s less energy available for discretionary uses.
Now I don’t have total buy-in to Morgan’s thesis. It certainly solidifies my thinking that the era of cheap energy is indeed over. It provides a unique and compelling way to think about this. And the proof is seemingly all around us. It explains the high oil prices and the surge in agriculture prices (agriculture relies on energy inputs).
You can’t help but being more bullish on energy and agriculture plays in the long-term. Oil drillers for one as they’re more reliant on increased work than the price of oil. Also, the likes of fertiliser companies given agriculture land is tapped out, making an increase in output essential and thereby requiring greater quantities of fertiliser.
Morgan thinks inflation is on the way given a squeezed energy base with still escalating monetary bases. Regular readers will know that I am a deflationist over the next few years. But nothing is certain in this world and Morgan’s arguments on this front have some credibility.
As for whether this spells the end of a glorious 250 year period of economic growth, well, I’m not so sure. The link between energy and economies is compelling. But whether we’re at a tipping point where surplus energy disappears is a guess. I’m convinced that we’re coming up against resource constraints that will inhibit economic growth. To say that we’re imminently coming to the end of economic growth requires further evidence, in humble opinion.
Impact on Asia
Asia has been the largest demand driver for energy over the past decade. The region’s net oil imports total 17 million barrels of oil a day. China is now the largest net oil importer, having recently overtaken the U.S.. Other large net oil importers in Asia include India and Indonesia. Obviously, higher oil prices would be detrimental to these net importing countries.
It may be somewhat offset by agricultural prices staying higher for longer. China and India are agricultural powerhouses. And the impact of agriculture on their economies is still profound (agriculture accounts for 14% of Indian GDP and 10% of China).
On the other hand, higher agricultural prices mean higher food prices. And given lower incomes in Asia, the proportion of household budgets dedicated to purchasing food is much higher than the developed world. Therefore higher food prices has a larger impact on many Asian countries. Witness periodic recent protests on this issue in Indonesia, Thailand and India. So net-net, higher energy prices would still be a large negative for Asia.
Turning to resource constraints potentially inhibiting future economic growth: given Asia has the world’s strongest GDP growth, it would be disproportionately hit if this scenario is right. The past decade may represent a peak in the region’s economic output. Whether there’s sharp drop or gradual fade is impossible to forecast.
These are but a few of the potential implications for Asia.
AC Speed Read
– The real economy is a surplus energy equation, or the harnessing of ever-greater quantities of energy.
– That equation has deteriorated to such an extent that one can now declare the era of cheap energy over.
– If the economy is energy and cheap energy is gone, future economic growth will be inhibited.
– Consequently, higher energy and agricultural prices can be expected in the long-term.
– The impact on Asian growth may be disproportionately large.
This post was originally published at Asia Confidential:
Before the “shale revolution” many considered that the biggest gating factor for US economic growth is access to cheap, abundant energy abroad – indeed, US foreign policy around the world and especially in oil rich regions was largely dictated by the simple prerogative of acquiring and securing oil exposure from “friendly” regimes. And while domestic US crude production has soared in recent years, making US reliance on foreign sources a secondary issue (yes, the US is still a major net importer of crude) at least as long as the existing stores of oil at domestic shale sites are not depleted, marginal energy watchers have shifted their attention elsewhere, namely China.
Recall that as we reported in October, a historic event took place late in the year, when China (with 6.3MMbpd) officially surpassed the US (at 6.24MMbpd) as the world’s largest importer of oil. China’s reliance on imports is likely only to grow: “In 2011, China imported approximately 58 percent of its oil; conservative estimates project that China will import almost two-thirds of its oil by 2015 and three-quarters by 2030.”
Which means that the question that most were focused on before, i.e., where the US gets its oil, and what is the US energy strategy, refocuses to China.
We have some answers.
The graphic below summarizes all the known Chinese energy import transit routes.
Some additional color from the 2013 Annual Report to Congress on all key developments relating to China:
China’s Energy Strategy
China’s engagement, investment, and foreign construction related to energy continue to grow. China has constructed or invested in energy projects in more than 50 countries, spanning nearly every continent. This ambitious investment in energy assets is driven primarily by two factors. First, China is increasingly dependent upon imported energy to sustain its economy. A net oil exporter until 1993, China remains suspicious of international energy markets. Second, energy projects present a viable option for investing China’s vast foreign currency holdings.
In addition to ensuring reliable energy sources, Beijing hopes to diversify producers and transport options. Although energy independence is no longer realistic for China, given population growth and increasing per capita energy consumption, Beijing still seeks to maintain a supply chain that is less susceptible to external disruption.
In 2011, China imported approximately 58 percent of its oil; conservative estimates project that China will import almost two-thirds of its oil by 2015 and three-quarters by 2030. Beijing looks primarily to the Persian Gulf, Africa, and Russia/Central Asia to satisfy its growing demand, with imported oil accounting for approximately 11 percent of China’s total energy consumption.
A second goal of Beijing’s foreign energy strategy is to alleviate China’s heavy dependence on SLOCs, particularly the South China Sea and the Strait of Malacca. In 2011, approximately 85 percent of China’s oil imports transited the South China Sea and the Strait of Malacca. Separate crude oil pipelines from Russia and Kazakhstan to China illustrate efforts to increase overland supply. A pipeline that would bypass the Strait of Malacca by transporting crude oil from Kyuakpya, Burma to Kunming, China is currently under construction with an estimated completion time of late 2013 or early 2014. The crude oil for this pipeline will be supplied by Saudi Arabia and other Middle Eastern and African countries.
Given China’s growing energy demand, new pipelines will only slightly alleviate China’s maritime dependency on either the Strait of Malacca or the Strait of Hormuz. Despite China’s efforts, the sheer volume of oil and liquefied natural gas that is imported to China from the Middle East and Africa will make strategic SLOCs increasingly important to Beijing.
In 2011, China imported 14.3 billion cubic meters (bcm) of natural gas, or 46 percent of all of its natural gas imports, from Turkmenistan to China by pipeline via Kazakhstan and Uzbekistan. This pipeline is designed to carry 40 bcm per year with plans to expand it to 60 bcm. Another natural gas pipeline designed to deliver 12 bcm per year of Burmese-produced gas is under construction and estimated for completion in late 2013 or early 2014. This pipeline parallels the crude oil pipeline across Burma. Beijing is negotiating with Moscow for two pipelines that could supply China with up to 69 bcm of gas per year; discussions have stalled over pricing differences.
As for China’s Top Crude suppliers as of 2011:
Finally, from a previous Zero Hedge post on this topic, here is why China’s increasing reliance on Crude imports means that the ascent of the Petroyuan is assured, and why by implication the days of the Petrodollar may be numbered: an outcome which the US will hardly be pleased with.
So what does this shift in oil imports mean?
More than anything else, it is a sign that China will increasingly depend on global markets to satisfy its ever-growing oil demand. This necessitates further engagement with the international system to protect its interests, encouraging a fuller integration with the current liberal order. This will have effects on both China’s approach to its currency and its diplomatic demeanour.
Derek Scissors wrote last week that this shift might usher in a world where oil is priced in RMB as opposed to solely in USD. This transition could only occur, however, if the RMB was made fully convertible and Beijing steps back from its current policy of exchange rate manipulation. Earlier this year, HSBC predicted that the RMB would be fully convertible by 2017, a reality that is surely hastened by its position as the single largest purchaser of foreign oil. A fully convertible RMB would be a “key step in pushing it as a reserve currency and enhancing its use in global trade, saidSacha Tihanyi, a strategist at Scotia Capital.
On the diplomatic side, while the United States is unlikely to withdraw from its role as defender of global oil production or guarantor of shipping routes, an increasing reliance on foreign oil will push Beijing toward a more engaged role within the international community. It is likely that we will see a change in Beijing’s approach to international intervention and future participation in multilateral counterterrorism initiatives—anything to ensure global stability. In the future, anything that destabilizes the oil market will increasingly harm China more than the United States. While Beijing views this increased import reliance as a strategic weakness, it a boon for those hoping to see Beijing grow into its role as a global leader.
Bottom line: as Chinese oil imports grow, Beijing will become increasingly reliant on the current market-oriented global system—this is nothing but good news for those that enjoy the status quo.
This morning’s apparent U-turn in US-Iran relations – when the US demanded the UN rescind Iran’s invite to the Syrian peace conference having somewhat instigated their invitation in the first place – is a little confusing for some. However, as OilPrice’s Joao Peixe points out, reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that is sure to upset the powers that be in Washington.
Reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that could boost Iranian oil exports, prompting harsh responses from Washington, which says such a deal could trigger new US sanctions.
So far, talks are progressing to the point that Russia could purchase up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods, according to Reuters.
“We are concerned about these reports and Secretary (of State John) Kerry directly expressed this concern with (Russian) Foreign Minister (Sergei) Lavrov… If the reports are true, such a deal would raise serious concerns as it would be inconsistent with the terms of the P5+1 agreement with Iran and could potentially trigger US sanctions,” Caitlin Hayden, spokeswoman for the White House National Security Council, told Reuters.
Russian purchases of 500,000 bpd of Iranian crude would lift Iran’s oil exports by 50% and infuse the struggling economy with some $1.5 billion a month, some sources say.
Since sanctions were slapped on Iran in July 2012, exports have fallen by half and Iran is losing up to $5 billion per moth is revenues.
In the meantime, a nuclear agreement reached in November with Iran and world powers is in the process of being finalized, and the news of the potential Russian-Iranian oil swap deal plays to the hands of Iran hawks in Washington who are keen to seen the November agreement collapse.
The November agreement is a six-month deal to lift some trade sanctions if Tehran curtailed its nuclear program. Technical talks on the agreement began last week.
Under the terms of the tentative November nuclear agreement, Iran will be allowed to export only 1 million barrels of oil per day.
In mid-December, Iranian oil officials indicated that they hoped to resume previous production and export levels and would hold talks with international companies to that end.
This announcement sparked an immediate reaction from US Congress, which has threatened oil companies with “severe financial penalties” if they resume business with Iran “prematurely” following the six-month agreement reached in Geneva.
There are plenty of figures in Congress—Republican and Democratic alike—who are opposed to the deal. The key “Iran hawk” in US Congress, South Carolina Republican Lindsey Graham, has described the deal as “so far away from what the end game should look like”, which should be to “stop enrichment”.
The opposition in this case believes any talk between Tehran and Western oil companies is premature because they are convinced that we won’t see a comprehensive resolution after the six-month period, and that sanctions will be laid on stronger than ever before.
Yet again, it would seem, Iran is another proxy pissing match between the US and Russia… and remember, nothing lasts forever...
At $91.70, front-month WTI crude prices have dropped to a fresh 7-month-low this morning. The mainstream media is already crowing of what this means for gas prices and how that will be an implicit “tax-cut” – even though gas prices remain at or near record-high levels for this time of year. The issue with this thinking, of course, is Brent crude (which more closely correlates to US gasoline prices) remains stubbornly high at around $107 as the spread between WTI and Brent surges over $15.