China Seizes Opportunity to Fill Its Petroleum Reserve. Should Others?

• China is apparently snapping up cheap oil cargoes to fill its strategic petroleum reserve.
• That might make sense for the US, too, if earmarked for new regional SPRs, rather than refilling the existing one on the Gulf.

The Wall St. Journal has reported that state-owned oil companies in China are capitalizing on lower prices to fill that country's strategic petroleum reserve (SPR). The obvious question is whether the US should do the same, particularly since surging oil output from shale deposits is a major factor in the recent rebalancing of the oil market. If that means putting more oil into caverns on the Gulf Coast, the answer should be no. However, this could be an opportunity to begin creating strategic reserves for parts of the country like the West Coast that are poorly served by our 1970s-vintage SPR.

Superficially, $80 oil provides a tempting chance to turn a profit while replacing the 30 million barrels of oil the US government sold as part of a "coordinated release" with other International Energy Agency members during the Libyan revolution. Comparing the average WTI price in June 2011 to today's, the Department of Energy could pocket around $15 per barrel on the overall sale and repurchase. However, much has changed in the last three years.

When I examined this subject a year ago, the dramatic reduction in US oil imports resulting from the combination of resurgent production and lower consumption had roughly doubled the effective capacity of the SPR, in terms of the number of days of lost imports it could cover in a crisis. Since then, US crude oil imports have fallen by another 5% or so, increasing SPR coverage correspondingly--at least for the parts of the country to which it can easily deliver.

Yet as I noted in another post earlier this year, US oil imports aren't just falling; they are shifting in location. The West Coast, where domestic production has been declining, not growing, now accounts for about 15% of US crude oil imports. It has essentially no dedicated petroleum reserve, other than commercial inventories that are roughly 50% lower than when I traded oil for Texaco's refining and marketing subsidiary in the early 1990s. If oil prices fell much further, it might even make sense for west coast refiners to stock up, regardless of what official action the US government took.

With US oil production still increasing, demand stable or falling, oil imports shrinking, and imports from Canada growing in both absolute and relative terms, it is high time to reconsider holding nearly 700 million barrels of oil--$55 billion worth even at today's depressed prices--in a part of the country where production could soon surpass its 1972 peak. This seems like exactly the kind of overdue reform opportunity that a new Congress might be interested in taking up next year.

How Would We Provide Enough Energy For 11 Billion People?

• Reconciling energy and environmental concerns was challenging enough when global population seemed headed for a plateau around 9 billion.
• A new forecast of up to 12 billion people by 2100 raises large questions about the capacity of current energy technologies to meet future global needs.

The combination of forecasted global economic weakness and growing non-OPEC production continues to weigh on oil prices.  Brent crude has fallen below $90 per barrel, and the US benchmark has been flirting with $80. But just when the rapid growth of energy supplies has undermined the mood of energy scarcity that prevailed for the last four decades, a group of demographers has thrown us a curve ball, though admittedly a very long one. 

In the 1970s many people were concerned about a "population explosion." Dystopian fiction--already a well-established sub-genre--featured visions of a grossly overcrowded future earth, along the lines of "Soylent Green." However, something happened on the way to such nightmares: birth rates in developed countries as well as large developing ones like China slowed in tandem with rising incomes. Instead of a world of 12 billion by 2100 or sooner, long-term population estimates in the last decade, including from the United Nations, began to focus on an eventual plateau around 9 billion.

Now it appears those lower forecasts might have been too optimistic, particularly with regard to birth rates in sub-Saharan Africa. The analysis in a paper published in Science last month suggests that growth will continue beyond the end of the current century. The authors expect global population in 2100 to reach 9.6 to 12.3 billion. That could have significant implications for energy demand and climate change, among other environmental and development issues, while in turn being influenced by them.  Nick Butler, who writes on energy for the Financial Times, looked at this from the perspective of oil and other energy sources and concluded, "None of the current technologies...offer an adequate answer."

I would take Mr. Butler's observation a step farther.  It's extremely challenging to say anything confidently concerning how much energy the world of 2100 might need, or where it will come from. Forecasts are rarely accurate beyond a few years, and even scenario methods struggle to cope with the unknown-unknowns involved in such time frames.

Recall that in 1928--as far removed from today as 2100-- world oil production was less than 5 million barrels per day, and the first chain reaction making nuclear power possible was still 14 years in the future. Natural gas was mainly viewed as a low-value byproduct of oil production, while wind power was considered quaint. And with a global population of just over 2 billion at the time, meeting the energy needs of today's 7 billion might have seemed even more daunting than supplying 11 or 12 billion does to us.

It's also worth keeping in mind that more than three-fourths of today's oil is consumed by countries with just 60% of the world's population.  The curve drops off steeply from there, leaving roughly 2 billion without modern energy services. So the energy implications of an extra two billion people by the turn of the century depend heavily on whether their energy demand looks more like today's top 4 billion or bottom 2 billion energy consumers. The recent "Africa Energy Outlook" from  the International Energy Agency (IEA) examined how energy supply on that continent might develop, along with the necessity of shifting investment from exports to domestic consumption to bridge that gap.

For that matter, even if an expansion of global fossil fuel production on the scale required to meet the needs of billions of additional consumers were possible, due to the technology that is currently unlocking oil and gas from source rock rather than conventional reservoirs--a.k.a. the shale revolution--it would bypass any notions of a "carbon budget" that might constrain the projected global temperature increase to a manageable level. It's a reasonable bet that however many people are alive in 2100, they will use less fossil fuels per capita than we do.

Consider what some of today's mainstream forecasts indicate about the future energy mix. The main "New Policies" scenario of the IEA's 2013 World Energy Outlook sees renewable energy growing from 11% to 18% of total primary energy by 2035, while its more aggressive "450" scenario has these sources supplying 26%, with commensurate reductions in fossil fuels. Shell's current long-range scenarios envision divergent futures in which fossil fuels still supply 50-60% of nearly doubled energy demand by 2060, but shrink to around 20% or less by 2100.

One big trend that could help facilitate that kind of change is electrification, which will increasingly displace liquid fuels from illumination, cooking, and even transportation. That's important because while we have few practical large-scale alternatives to petroleum for liquid fuels, we have many ways to generate electricity and could accommodate more, including the long-awaited arrival of practical nuclear fusion--perhaps along the lines announced by Lockheed Martin earlier this month--or some other, currently unanticipated energy source. Eight decades would be more than sufficient for an entirely new generating technology to become significant. 

Reconciling the energy needs of a large, growing population with preventing dangerous global warming--referred to by some as the "energy dilemma"--thus appears to require a sustained, protracted transformation of the entire energy economy. That shouldn't be a surprising insight. The bigger question is whether such a transformation can be achieved through the gradual evolution of the energy technologies available today, or whether it will require revolutionary developments. That remains a matter of considerable debate in energy circles. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

The Impact of the Global "Sweet" Crude Bulge

• The recent slide in global oil prices has been compounded by the pressure that rising US shale oil production is putting on the price of sweet crude benchmarks like Brent.
• OPEC's producers may suffer as much as those in the US, while consumers benefit from significantly lower fuel prices than last year.

When the US went to war in Iraq in 2003, the price of oil embarked on a trend that took it from around $30 per barrel to nearly $150 before collapsing in the recession in 2008. This time, as a new US-led coalition takes on ISIS with a bombing campaign in Iraq and Syria, the price of oil is falling, down 20% in the last two months. It's not just that global economic growth has weakened recently, or that soaring shale oil output in the US has averted another oil crisis. Oil's current downturn also reflects the fact that new production from the Bakken, Eagle Ford and other shale deposits is particularly well-suited to undermine oil's global benchmark prices, for Brent and West Texas Intermediate, both of which are made up of light sweet crude oil streams.

The numbers for US shale, or "light tight oil" (LTO) as it's often called, are impressive, especially to those accustomed to watching the gradual ebb and flow of different oil sources over long periods. In the 12 months ending in June 2014, US oil production grew by 1.3 million barrels per day (MBD), not far short of Libya's pre-revolution exports. Since January 2011, the US added 3 MBD, or about what the UK produced at its peak in 1999. In fact, since 2010 incremental US LTO production has exceeded the net decline of the entire North Sea (Denmark, Norway and UK) by around 2 MBD, contributing to a significant expansion of Atlantic Basin light sweet crude supply.

The New York Mercantile Exchange defines light sweet crude as having sulfur content below 0.42% and an API gravity between 37 and 42 degrees. That's less dense than light olive oil. The specification for Brent is similar. Much of the LTO produced from US shale formations fits those specifications, and what doesn't is typically even lighter and lower in sulfur.

The current "contango" in Brent pricing, in which contracts for later delivery sell for more than those for delivery in the next month or two, is another sign of a market that is physically over-supplied: more oil than refineries want to process, with the excess going into storage. However we also see indications that the historical premium assigned to lighter, sweeter crude versus heavier, higher-sulfur crude is under pressure.

One example of this is the gap or "differential" between Louisiana Light Sweet, which wasn't caught up in the delivery problems that plagued West Texas Intermediate for the last several years, and Mars blend, a sour crude mix from platforms in the Gulf of Mexico. From 2007-13 LLS averaged around $4.50 per barrel higher than Mars, while for the first half of this year it was only $2.75 higher and today stands at around $3.40 over Mars.

And while OPEC's reported Reference Basket price has been falling in tandem with Brent, its discount to Brent had also narrowed by about $1 per barrel, prior to the price plunge of the last couple of weeks, compared with the average for 2007-13. Considering that OPEC's basket includes light sweet crudes from Algeria, Libya and Nigeria that sell into some of the same Atlantic Basin markets as Brent, that looks significant.

By itself a narrowing of the sweet/sour "spread" of only a dollar or so per barrel isn't earth-shattering. However, because the surge of US oil production is effectively focused on the oil market segment represented by the price of Brent, it compounds the pressure on OPEC, many of whose members link the price of their output to Brent. This might help explain why the response of OPEC's leading producer, Saudi Arabia, has been to cut prices rather than output, in an apparent effort to maintain market share rather than price level.

The Saudis know better than anyone how that movie could end. The Kingdom's1986 decision to implement "netback pricing", linking the price of its oil to the value of its customers' refined petroleum products, helped precipitate a price collapse so deep that it took oil prices 18 years to reach $30/bbl again, by which time the dollar had lost a third of its value.

Whether aimed at US shale producers or as a reminder to the rest of OPEC, which appears to be unprepared to make the output cuts necessary to defend higher oil prices, the Saudi action increases the chances that oil prices will over-correct to the downside, rather than rebounding quickly. If so, the impact of the sweet crude bulge in the Atlantic Basin--only a little more than 3% of global oil supplies--could play a disproportionate role in prolonging the pain producers will experience until oil markets eventually reach a new equilibrium.

In the meantime, US consumers are benefiting from gasoline prices that are already $0.15 per gallon lower than this week last year. Today's wholesale gasoline futures price for November equates to an average retail price well below $3.00 per gallon, after factoring in fuel taxes and dealer margins, compared to last year's average retail price for November of $3.24. After factoring in lower diesel and heating oil prices, the fall in oil prices could put an extra $10 billion in shoppers' pockets for this year's holiday season.

A substantially different version of this post was previously published on the website of Pacific Energy Development Corporation

Calibrating Solar's Growth Potential

• A new report from the International Energy Agency suggests the possibility of solar power becoming the world's largest electricity source by 2050.
• It is noteworthy that IEA thinks this could happen, but the growth rates required, let alone the policies necessary to support them, will be challenging to sustain.

In the wake of last month's UN Climate Summit in New York City, Monday's report from the International Energy Agency (IEA) on "How solar energy could be the largest source of electricity by mid-century" ought to be welcome news. At the same time, it conflicts with perceptions that some countries are already farther along than that. So IEA's indication of the feasibility of generating 26% of global electricity from solar energy by 2050 either looks quite ambitious or quite conservative, depending on your current perspective.

For me it always comes down to the numbers, without which it's impossible to grasp systems on the scale and complexity of global energy. IEA's high-solar roadmap--it's not a forecast--includes significant contributions from both solar photovoltaic power (PV) and solar thermal electricity (STE)--often referred to as concentrating solar power, or CSP--with the former making up 16% of global electricity at mid-century and the latter around 10%. As the detailed report from IEA indicates, achieving the headline result would require global installed PV capacity to grow 35-fold between 2013 and 2050, equivalent to an average of 124 Gigawatts (GW) per year of additions, peaking at "200 GW/yr between 2025 and 2040." That's a 6x increase in installations over last year.

To put that in a US electricity generation perspective, IEA projects that the US would have to hit one million GW-hours per year from PV--roughly what we currently get from natural gas power plants--by around 2035 to meet its share of the anticipated global solar buildup. US solar installations are on a record-setting pace of nearly 7 GW this year, but matching natural gas would require 120x growth in solar generation, or a sustained compound average growth rate over 25% for the next 20-plus years. That's not impossible, as recent PV growth has been even higher, but it won't be easy to continue indefinitely, especially without further improvements in the technology, and in energy storage.

The solar thermal portion of IEA's technology roadmap looks like a much tougher challenge. STE has been losing ground to PV lately, as the costs of the latter have fallen much faster than the former, for reasons that aren't hard to understand. Making PV modules cheaper and more efficient is analogous to improving computer chip manufacturing, while making STE cheaper and more efficient is more similar to manufacturing cheaper, more efficient cars or appliances.

One of the main reasons IEA appears to have concluded that STE could suddenly start competing with PV again is its inherent thermal energy storage capability, which enables STE to supply electricity after the sun has set. While I wouldn't discount that, it looked like a bigger benefit a few years ago, before electricity storage technology started to improve. Storage of all types is still expensive, which helps explain why fast-reacting natural gas power plants offer important synergies for integrating intermittent renewables like wind and solar power. However, it looks like a reasonable bet today that batteries and other non-mechanical energy storage technologies will improve faster than thermal storage in the decades ahead.

The upshot of all this is that getting to 16% of global electricity from PV by 2050 is a stretch, and the 10% contribution from STE looks like even more than a stretch. So how does that square with recent reports that Germany--hardly a sun-worshipper's paradise--got "half its energy from solar" for a few weeks this summer? A recent post on The Energy Collective does a better job of clarifying the significance of that than I could, providing links to German government data indicating that solar's average contribution in 2013 was just 4.5% of electricity--hence less than half that in terms of total energy consumption. The author extrapolates that at current rates of annual installations, it would take Germany nearly a century to get to 50% of its electricity from the sun.

Much can happen in 35 years that we wouldn't anticipate today. For now, solar PV looks like the energy technology to beat, in terms of low lifecycle greenhouse gas emissions and long-run cost trends. But whether it reaches the levels of market penetration the IEA's report suggests are possible, or tops out at less than 5% of global electricity supply, as their baseline scenario assumes, it must function within an energy mix that includes other technologies, such as fossil fuels, nuclear power and non-solar renewables. And that's true whether or not electric vehicles take off in a big way, which would significantly increase electricity demand and make the IEA's high-end solar targets even more difficult to reach.