The Thirst For Oil Keeps Growing
Have you noticed how oil is demonized and basically left for dead? We all know the push to replace fossil fuels is on and many nations are taking aggressive stances against it. The challenge is that it is not working.
Look at the UK. How many power companies went bankrupt? Johnson wants to be the wind energy capital of the world. There is a problem with that when the wind does not blow. This is going to be a rough Winter for many across Western Europe. Natural gas prices are already high and, if it is a harsh Winter, they can go even higher.
For all the talk about the demise of oil, the problem is that it will not happen. This does not mean that renewables will not keep expanding; they will. However, to think that we are getting away from fossil fuel anytime soon is absurd.
Energy Needs Growing Exponentially
Do you like your laptops and smartphones? How are you enjoying all the streaming services you get? Isn't if fun to drive around in your brand new Tesla?
Do you know what they all have in common?
They require a vast amount of energy. The reality is the total energy consumption is growing and that will not change for the next few decades. As more people join the developed world in terms of the technologies they use, power needs will only grow.
The IEA just brought out their latest forecast. Here we see some very interesting projections.
As we can see, renewable energy will continue to have the greatest growth rate. That is not going to change over the next 3 decades. However, we also see the use of oil, gas, and coal also experiencing their own growth rates.
This is an enviable outcome for many. They believe that the rush to renewable should happen and the shutdown of all fossil fuels needs to happen today.
Bloomberg is not exactly known for being a big supporter of fossil fuels. The owner, Michael Bloomberg, tells everyone how we need to reduce the CO2 output immediately. Of course, this is the guy who owns more than a dozen mansions and two private jets but we will leave that aside. The key is that he, at least in his rhetoric, is all on board with the push to end fossil fuels.
This creates quite a quandary when Bloomberg itself posts this headline:
Have you seen what is happening in China? In Germany? In the UK? This is just a taste of what is to come. Keep in mind, it is October, what will things look like in January or February?
For Europeans, welcome to Putin's world. He is going to leverage this situation to have ever leader from the West kissing his ring. Price gouging will take place like never before. If the Europeans want gas, they are going to have to meet his demands (and price). We will see years of Russian debt eliminated in one Winter.
The bottom line is leaders better get accustomed to the fact that fossil fuels are going to be required for the next few decades. If they keep the push to end them going, it will cost a lot of lives. What happened in Texas last Winter with hundreds freezing to death might be a regular occurance.
Energy Investment
Over the last few years, the capital investment by oil companies was reduced by a large margin. This started before COVID which is putting us in the situation we are now. Without energy, economies will end up contracting significantly.
The present circumstances in China is just a smidgeon of what is to come. That country is, naturally, an exporting nation. It manufactures products that are shipped all over the world. Over the last few weeks, plants were shut down for days on end. This naturally has an impact upon output.
As economic activity contracts, standards of living go down. Simply, this environment means people lose jobs. There is a reason why the energy sector is one of the largest in the world. It is also one of the most important.
Less energy means less overall productivity. Some might like that until they realize that means people being unemployed. No matter how you slice it, higher energy prices do not affect a population evenly. Also, when they hit, they tend to crush segments since discretionary spending is reduced.
Since the energy sector moves at the pace of, well, an oil tanker, decisions take years to go into effect. A reduction in capital expenditures cannot be swiftly reversed. Even if there is the decision to increase the spending, it takes a number of years before the impact is felt.
Here is the latest United States rig count data:
As we can see, after the shutdown due to the pandemic, the rig counts have grown nicely. We are near double the level from a year ago.
However, as the next chart shows, we are down a great deal from three years ago.
We are still less than half of where we were back then. Is there any wonder why oil prices are going through the roof in spite of demand still being weak compared to before the lockdowns?
The reality is the supply was obliterated and will remain that way for a while. Of course, with certain fuels, this can be offset.
For example, we know the global economy cannot sustain radically higher oil prices. It proved it twice over the last 15 years. The first time saw $140 oil which was met with an economic collapse while the second with new technology.
How will this one be received? That remains to be seen.
What we do know is that when something is needed for heat, like natural gas, there is no way to substitute that. For this reason, those who are dependent upon it will have no choice to pay. Yet that is only a piece of the puzzle.
The reality is we do not have enough to meet the demand, no matter what the price. Once again, China is showing us what it is like to be without coal. Since many plants were shut down in Europe, they are finding they have to turn to this also since that is what the back up facilities use. Like China, they are finding it lacking.
We are in a technological age. This means that something has to power all this technology. It is evident that, in spite of the massive growth in renewable energy, that is not going to carry all of the load for at least the next 30 years. This means the thirst for oil will keep growing.
There is always the option of using less energy. Many are online promoting that idea. Perhaps they should take the lead by turning off their laptops and phones to conserve.
Of course, we all know that will not happen. Like Michael Bloomberg, that is always for someone else. They should go without the modern comforts.
Therefore, expect the thirst for oil to keep growing. The only question is how soon the oil companies start making the massive investments to get the oil flowing.
I have a feeling a really bad Winter with people freezing will change their view of things. This is something that is going to carry on for decades.
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