Monday, January 12, 2009

Another Tumultuous Year?

Whether or not next week's inauguration of the 44th President of the United States marks the true start to the 21st century, as a Washington Post columnist recently suggested, 2009 could herald momentous changes in long-term energy trends. While a return to the extraordinarily high oil prices we experienced last summer looks improbable, we could yet see a significant price spike as a result of geopolitical events--or a further slide towards $30 per barrel. Developers of alternative energy technologies and projects will be watching Washington intently, in hopes that the expected stimulus bill or separate energy legislation will boost their fortunes and unlock access to persistently tight credit. And against that backdrop, the behavior of consumers in a new economic environment bears watching, as the ultimate source of energy demand.

In no particular order, here's my list of energy trends and events to watch as the year gets underway:
  • Oil prices are being squeezed between the weight of accumulating inventories, especially at the Cushing, OK storage that comprises the New York Mercantile Exchange's main delivery point for West Texas Intermediate crude oil, and the anticipation that a combination of OPEC discipline and resurgent demand will tighten markets appreciably later in the year. The resulting contango remains very wide. The prompt contract, for delivery in February, has fallen below $40 per barrel, while oil for delivery in July sells for well over $50/bbl, with next year's crude going for more than $60.
  • As I noted on Friday, the gap between oil and natural gas has closed, even as gas has fallen below $5.50 per million BTUs, a level that is providing an energy-price stimulus for industrial and utility customers similar to the one that sub-$2 gasoline gives consumers. Gas is in contango, as well, though hardly as steep as oil. How long will the present US gas supply bubble persist, given the rapid decline rates of many gas wells and the weak finances of many of the big producers?
  • The influence of government over energy looks certain to expand this year. Will the stimulus bill satisfy the wish list of alternative energy and environmental advocates, including assistance for struggling ethanol producers, cash subsidies and loan guarantees for wind and solar firms, and big investments in infrastructure, including new long-distance power transmission and a down payment on the "smart grid" of the future?
  • An article in this morning's Wall Street Journal raised the prospect of a new wave of energy industry consolidation, similar to the one that created the "Super-Majors" (Exxon-Mobil, BP-Amoco-ARCO, Chevron-Texaco, Elf-Fina-Total) starting a decade ago. The industrial logic is probably there, though any merger would play out in a political context that seems much less likely to be receptive to such combinations, even if the publicly-traded oil companies do account for less than 10% of global oil reserves and less than 20% of production.
  • If the financial crisis has pushed geopolitical risk into the background, the conflict in Gaza and the revelation over the weekend that Israel had asked for US assistance in an attack on Iran's nuclear complex should remind us that it hasn't vanished entirely. Although the oil market is in a much better position to forgo Iran's oil exports than it would have been for the last several years, taking 2 million barrels per day off the market--a likely response to any attack on Iran--could still be good for a quick pop of $15-20/bbl, or an extra $0.40 or so per gallon at the pump.
  • Last year's weakness in the US dollar contributed to the summer's high oil prices, and the late-year dollar rally helped to unwind the residue of that spike. As the US deficit expands past $1 Trillion next year and into 2010, between fiscal stimulus and falling tax revenues, could the dollar begin falling again, and if so, what would that mean for energy prices? Economists tend to view these deficits as a manageable fraction of GDP. However, in absolute terms they are enormous, and they will compete with deficit spending all over the globe, taking us into uncharted territory.
  • Finally, we can't forget about consumers. If the sharp drop in demand--around 6% year-on-year--was the pin that popped the oil-price balloon, will low gas prices begin to revive it? But while today's average pump price for regular gasoline of $1.68/gal. is a whopping $1.42/gal. less than last January and $0.62 lower than the same week in 2007, it surely doesn't look quite so cheap as a fraction of average purchasing power, between declining home values that have dried up the home equity loans with which many consumers were supplementing their income, and rising unemployment. It will take some time to see whether the weak economy and vivid memories of $4+ gasoline have altered consumption patterns permanently, or just temporarily. That will have important implications for environmental policy, too.

It's going to be interesting, for good or ill, and I look forward to continue sharing my perspective on energy and related environmental matters with you, as Energy Outlook begins its sixth year.

No comments: