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The New Profit Points in the Shifting “Balance” of Power

by | published October 23rd, 2014

There’s a new wrinkle in the energy markets.

It revolves around what I call the “energy balance,” and its changing fast.

It’s not about new energy breakthroughs or big oil discoveries. And it’s certainly not about entirely new structures.

Rather, it’s about the accelerating changes in the elements you’re already familiar with.

Think of it, if you will, as a “rebalancing” of what currently exists. As you might have guessed, Asia is already playing a big role.

These fundamental changes are intensifying, handing us huge profit opportunities…

Why the Energy World is Fixated on Asia

In this case, there are actually two overriding considerations involved.

The first deals with the components that will comprise the balance. In other words, what different types of energies will go into the mix. The basic categories will still be crude oil, natural gas, coal, nuclear, hydro, and renewables (solar, wind, geothermal, biomass, and wave power).

The second considers from where those types of energy will be sourced from.

And while the move from coal to natural gas is well underway in the U.S. and in Germany from nuclear to solar/wind, the bulk of global energy needs are actually located elsewhere.

In fact, through 2035, the focus of energy use will be gravitating to Asia. And despite having huge shale gas reserves, Chinese power production will continue to require large amounts of coal.

But unfortunately, the predominant coal utilized by China is of inferior quality. That means the environmental problems a visitor immediately experiences in Beijing, Shanghai, and elsewhere will simply be getting worse.

The increase in Asian coal usage is expected to slow down over the next two decades, but that will occur more toward the end of the period than in the beginning. Still, the overall amount of coal in usewill continue to rise, even as reliance on gas, solar, wind and even unconventional oil (shale and tight) also increase.

So it’s the market demand generated in Asia that will progressively drive the energy sector worldwide.

We may be fixated on places like the Bakken and the Marcellus in America, but the real energy revisions are happening more than half way around the world.

As we eventually see the phase-in of both crude oil and liquefied natural gas (LNG) exports from the U.S., those products will be driven by demand primarily in Asia but also in Europe.

In Europe, this move is being driven by the Ukrainian crisis. Yet, this is merely the latest chapter in the ongoing realization by the EU in Brussels that it needs to do even more to diversify its sources of fuel. As it stands, Russian export prospects in Europe are declining while American, North African, and Qatari LNG deliveries are on the rise.

But the most important thing to note is that this massive change in energy trading is not merely the result of a new source of LNG (the U.S. and to a lesser extent Canadian exports from British Columbia). Rather, this is being driven by where the demand is now and where it will be increasing for the next several decades.

These global patterns are being pulled largely to Asia and it will only intensify.

The Big (And Profitable) Global Changes Ahead

When it comes to the mix of energy types, the balance is moving from coal internationally to natural gas and renewables. The advent of the LNG trade will allow for the development of local spot markets and increasing competitiveness by imports with local sources.

Currently, LNG is more expensive than piped gas in Asia, while the difference is beginning to decline in Europe. This price differential will shrink even more as the guaranteed trading volume increases.

On the renewable side, the move is even more interesting. Already, solar and wind are approximating grid parity with more traditional sources of electricity generation. That means the cost for these renewables is about the same – even without heavy government subsidies.

Politically, renewables have the strong support of environmentalists and the Green Party in Germany, while similar moves are beginning in France. France has always been the outlier, with the preponderance of its electricity coming from nuclear plants, apparently experiencing less opposition than elsewhere in the world.

In any event, nuclear power is making a pronounced recovery, even in Japan, where the government is now planning to phase back in a number of the plants taken offline after the Fukushima disaster.

Nuclear remains the most expensive infrastructure to build, but is by far the cheapest to operate. Permit request for new plants are now increasing worldwide, especially in China and are even increasing over pre-disaster levels in the U.S.

Throughout, despite what pundits may tell you, crude oil will remain the mainstay in international energy calculations, despite the rise of shale gas and the increasing interest in renewables.

Too much of the industrial, commercial, and private use infrastructure (especially when it comes to transportation) remains centered about crude. That will continue to be the case for at least the next twenty years.

Oil’s overall footprint may be declining, but its hold upon broader economic factors will remain.

Welcome to “Saudi America”

And that may make my final observation today all the more interesting…

It is true that the U.S. will soon overtake Saudi Arabia in daily crude production, thanks to the introduction of massive shale and tight oil reserves.

That has already had an impact on the global energy balance for the simple reason that U.S. daily import declines have had a knock-on effect. As the volume of available domestic crude continues to increase, so also will the pressure to allow exports.

Which makes a new development this morning so very interesting.

Part of the reason crude oil prices are increasing today is a report that available Saudi supplies may be lower than anticipated. Now this certainly needs to be put into context. It doesn’t mean Riyadh is hitting a peak oil wall. Far from it.

The situation is more along the lines of the following: Saudi production could probably rise to about 12.5 million barrels a day and remain there for decades. Nonetheless, they may be having a balance problem of another sort.

Saudi production has occupied the principal role as the global source of excess oil for some time. This is because it has the ability to put several million additional barrels into the export stream essentially in a matter of hours.

That apparently is where the constriction is forming. Not in what can be taken from the fields, but in how fast. It means their longtime position as the reserve of the world may be coming under pressure.

Two results will follow if this persists.

First, it opens the door for the U.S. to retake the position of the global reserve source it relinquished in the 1970s (once, of course, exports are allowed). Second, we will see a higher pricing floor for oil emerge.

Both of these will make their own interesting contributions to the energy balance picture.

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