Ten Factors Driving Energy Markets


How do we explain the growth in oil and natural gas supply in the US from tight formations and shale.  What we see happening today in the natural gas is not a bubble— it is the remnant of the bubble that burst in the Great Recession as record high prices for natural gas in the run-up to 2008 created the demand for more supply.  The worry then was that there was not enough gas to meet demand without importing it as LNG from the same wacky countries that sold us oil.   High priced LNG was expected to eat our lunch the same way high prices oil imports were doing. Remember all those LNG regas terminals that got built anticipating that LNG import wave that never materialized?

There is a different story in oil.  Oil prices were always global while natural gas prices were regional since before LNG little of it was globally traded.  LNG was just like air conditioning—it changed everything.
Oil is priced based upon the global market expectation of the marginal price of the swing productive capacity.  Since OPEC was formed that meant that Saudi Arabia as the world’s largest producer of oil and the only producer able to swing the level of production up or down effectively exercised market pricing power.
Cutting back swing oil production in the Arab oil boycott and related market crises in the 1970’s gave us long gasoline lines, spiking prices, inflation and rising tempers. On the other hand, when Saudi Arabia sees its interests aligned with the US (such as times tensions with Iran heat up) it can dial up the swing production levels, ease the market perception of supply disruption and send prices down.
Our dynamic energy political economy from the 1970’s till the Great Recession. What changed?
  1.  The great recession reduced demand for energy and many other things.
  2.  Lower demand meant lower prices for energy and many other things.
  3.  Energy efficiency combined with the recession encouraged consumers to buy more efficient cars, appliances, etc to ‘lock in savings’, insure against inflation to come.  Zero interest rates and cash rebates and driving in the HOV lane all helped car sales.
  4.  The Prius Effect:  We bought more efficient cars, etc but we ‘pocketed the savings’ and drove more, used more, etc.
  5. Producers see increased sales of cars, recovery of housing prices, etc and think–time to produce more oil & gas. Meanwhile technology from directional drilling and hydraulic fracturing means we can produce more gas & oil at home and need to import less.  Supply increases
  6. Producers drill for oil and get gas so they market gas.  Others drill for gas and get liquids so they market liquids.  Congestion in the pipelines is caused by more production onshore in the shale at a faster rate than new infrastructure construction can catch up.   Congestion in the US leads to the Brent-WTI price spread to reflect the market discount of US production holding back supply growth.
  7. Politics happen:  Keystone XL pipeline becomes an anti-fossil fuels environmental rallying cry.  Fracking is blasphemed in movies made by politically correct but clueless Hollywood stars. The House says drill baby drill while the Senate says no way.
  8. Supply keeps growing from the shale revolution. Barnett,Eagle Ford, Marcellus, Bakken are unqualified successes.  By 2011 the US is the world’s largest producer of natural gas; forget LNG imports we want to export LNG—first new export terminal goes on line in 2017.  By 2016 the US will be the world’s largest producer of oil.  Oil imports are dropping likely to bottom out at 35-45% down from the 75% +/-.  The US is the World’s Energy Super Power.  This reality really sucks for the environmentalists and anti-fossil fuel crowd.  The rest of us are cheering.
  9. The Obama Administration starts piling on regulation after regulation to assuage the wrath of its environmental base.  They never met a regulation they did not like.  Meanwhile supply keeps booming.  Regulatory challenges in court meet with partial success.  Electoral results in 2010 and hoped for results in 2014 and 2016 could create a more energy friendly Wash DC.
  10. I saved the best for last in my top ten list—-GHG emissions in the US went down and continue to fall despite the shale boom.  The climate science is not as settled as Al Gore told us since global temps refuse to rise as politicians had told us they would.  The good news is NYC will not be under water from rising seas—the bad news is neither with Washington DC.

There ends my rant!  Damn that felt good.