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U.S. Energy Independence and $247 Oil by 2030

By Jim Fink on March 6, 2012

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The S&P 500 is up 8.8% since the beginning of the year, its strongest start in more than 20 years (1991). Yet, as I predicted in Crude Oil is a Better Bet Than Stocks, investors could have made even more money in oil than they have made in stocks. For example, gasoline and crude oil are up 17.6% and 15.8%, respectively, so far this year:

Source: Bloomberg

Lest you think you can make money throwing darts at any energy commodity, take note that both coal and natural gas have plunged in 2012, so oil is just about the only game in town for investors to go long. Higher oil prices are great for commodity investors, but detrimental to the U.S economy as a whole, as well as to anyone who heats their home with oil or drives a gasoline-powered car.

President Obama’s Speech on American Energy Policy

Tthe spike in oil prices have become a political issue and President Obama discussed the problem in a March 1st speech on American energy policy. Obama’s solution is two-pronged: (1) encourage “safe and responsible” domestic oil production; and (2) promote energy efficiency (e.g., 55 miles per gallon fuel economy standards by the middle of the next decade) and alternative energy sources such as solar, wind, and biofuels (interestingly, Obama failed to mention nuclear power). According to Obama, “we’ve got to do both” and can’t rely solely on increased oil production:

Anybody who tells you that we can just drill our way out of this problem does not know what they’re talking about or they’re not telling you the truth. The United States consumes more than 20 percent of the world’s oil, but we only have 2 percent of the world’s oil reserves — 20 percent we use; we only produce 2 percent.  And no matter what we do, it’s not going to get much above 3 percent.  So we’re still going to have this huge shortfall. We can’t just drill our way to lower gas prices.

That’s why if we really want energy security and energy independence, we’ve got to start looking at how we use less oil, and use other energy sources that we can renew and that we can control, so we are not subject to the whims of what’s happening in other countries. 

Obama admits that the U.S. has become less dependent on foreign sources of oil, stating:

Six years ago, 60 percent of the oil we used was imported. Since I took office, America’s dependence on foreign oil has gone down every single year. In fact, in 2010, it was under 50 percent for the first time in 13 years.

When it comes to oil production, America is producing more oil today than at any time in the last eight years and we have a near-record number of oil rigs operating right now — more working oil and gas rigs than the rest of the world combined

Obama should have added that the United States is now a net exporter of refined petroleum products for the first time in more than 60 years (i.e., since 1949).

U.S. Energy Independence Will Be a Reality By 2030 Thanks to Fracking Technology

This U.S. resurgence in oil production is an amazing phenomenon that is due almost entirely to oil shale discoveries in Montana/North Dakota’s Bakken and Texas’ Eagle Ford regions. The horizontal drilling and fracking revolution that has created a 100-year supply of natural gas is now being utilized to unlock “tight” oil supplies trapped within rock. The Bakken region is estimated to hold 3.65 billion barrels of technically-recoverable oil and by 2015 North Dakota will be the second largest oil-producing state behind Texas (surpassing Alaska and California).

The last time the U.S. achieved energy independence was in 1952. According to a February 15th report from Citigroup’s oil analysts, oil shale development will make the U.S. once again energy independent by 2020:

U.S. crude and product imports are now about 11 million barrels a day, with about 3 million barrels a day of product exports. This leaves import reliance at 8 million barrels a day. If shale oil grows by 2 million barrels a day, which we think is conservative, and California adds its 1 million barrels a day to the Gulf of Mexico’s 2 million barrels a day, we reduce import reliance to 3 million barrels a day.

Canadian production is expected to rise by 1.6 million barrels a day by 2020, and much of this will effectively be stranded in North America, and there is the potential to cut demand both through conservation and a shift in transportation demand to natural gas by at least 1 million barrels a day and by some calculations by 2 million barrels a day.

BP (NYSE: BP) reaches a similar but slightly less optimistic conclusion to Citigroup, stating in its Energy Outlook 2030 (pp. 5, 78-79) that U.S. oil import dependency will be halved by 2030, but 32% of its oil demand will still need to be imported. The good news is that U.S. import demand will be fully satisfied by friendly countries in the Western Hemisphere: Canada, Mexico, and Brazil:

The growth of unconventional supply, including U.S. shale oil and gas, Canadian oil sands and Brazilian deep-waters, against a background of a gradual decline in oil demand, will see the western hemisphere become almost totally energy self-sufficient by 2030.

In other words, U.S. dependence on Arab oil will be history: bye, bye oil sheiks of the Middle East! The Americas – not the Middle East – will soon be the world capital of energy and the U.S. will overtake Russia as the world’s largest energy producer within eight years.

According to MIT economics professor Richard Schmalensee, energy independence does not mean that U.S. consumers will be immune from global oil price shocks. After all, the demand for oil will continue to explode in emerging markets like China and India and U.S. oil producers will sell to the highest bidder. The good news is that some of the money being paid for high-price oil will go to North Dakota rather than Saudi Arabia and that is a very good thing for U.S. national security and world peace.

The energy future looks very bright for the United States and looks very bleak for China, India, and the European Union. Just look at the degree of oil-import dependency faced by these countries by 2030 in the BP presentation (page 78):

  • European Union: 94% 
  • India: 91%
  • China: 80%

See you; I wouldn’t want to be you.

Crude Oil Will Hit $247 Per Barrel by 2035

According to the Paris-based International Energy Agency (IEA), a 28-member group of oil-importing countries organized in the face of the 1973 Arab oil embargo, oil prices will skyrocket to $247 by 2035.  Based on an average 2011 price of $101.54 (page 6), this would amount to a 143% price increase! Sounds like a lot, but that projected price increase is over a 24-year period so the annualized gain is only 3.8%. An interesting question is how much of this 3.77 projected annual price increase is due to increasing real demand and how much is due to inflation? The answer can be derived by the Fisher equation:

(1+inflation) * (1+real) = (1+nominal)

The IEA World Outlook 2011 (page 62) projects oil prices in constant 2010 dollars (i.e. real) to rise to $140 per barrel by 2035. Divide the $140 real projected price in 2035 by the $101.54 average price in 2011 yields a real increase of 37.9% or 1.35% annualized.

To find the inflation component, divide (1+ the total nominal annualized price increase of 3.77%) by (1+ the 1.35% annualized real price increase) and the result is an annualized inflation increase of 2.39%. In other words, most (63%) of the projected increase in the oil price to 2035 is due to inflation and only 37% is due to increased real demand. The long-term average inflation rate is 3.24%, so the IEA’s 2.39% annualized inflation projection over the next 24 years is below average inflation which makes sense given the “new normal” of below-average economic growth due to the global debt crisis.

Bottom line: U.S. energy independence is going to happen soon thanks to fracking technology which is already here and doesn’t need any government subsidies. As the Exxon Mobil (NYSE: XOM) 2012 report entitled The Outlook for Energy: a View to 2040 points out (page 1):

Oil, gas and coal continue to be the most widely used fuels, and have the scale needed to meet global demand, making up about 80 percent of total energy consumption in 2040.

Renewable energy sources may be “cute,” but simply aren’t game changers for the foreseeable future and taxpayer money should certainly not be wasted on developing these tangential energy sources. Just look at the chart on page 19 of this paper prepared by the International Energy Forum (IEF) which shows the relative share of world energy demand different energy sources commanded  as of 2009 and as projected by the IEA in 2035:

Energy Source

2009 Market Share

2035 Market Share

Oil

33%

27%

Coal

27%

30%

Natural Gas

21%

23%

Nuclear

6%

6%

Hydro

2%

2%

Biomass

10%

9%

Other Renewables (e.g., solar, wind)

1%

3%

 

The share of the “big three” fossil fuels (oil, natural gas, and coal) remains virtually the same (80% vs. 81%) over the next 24 years with the share commanded by renewable energy sources increasing by only 1%.

Among the fossil fuels, the Exxon report (pp. 8, 29) projects that coal is the long-term loser: coal usage will peak in 2025 and then “begin a long-term decline for the first time in modern history.” Coal stocks certainly have performed horribly so far in 2012, but I don’t think that the stock market is anticipating coal’s post-2025 demise just yet. Rather, coal is suffering from increased environmental regulations limiting toxic air emissions and the shift of electric utilities to extremely-cheap natural gas.

Hands Off U.S. Energy Policy, President Obama

In conclusion, President Obama’s March 1st speech arguing that more government subsidies for renewable energy sources is necessary to achieve U.S. energy independence is just plain wrong. Pursuing costly and uneconomic renewable energy sources is not needed for the U.S. to achieve energy independence. Fracking U.S. oil shale deposits will do the job, thank you very much. The U.S.government should stop interfering with energy markets and let the United States achieve energy independence the old fashioned way – through the free market and American private-sector ingenuity.

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Stock Talk

  1. avatar
    Joseph Pajak Reply March 22, 2012 at 6:20 PM EST

    Very good information.
    Great insight.

  2. avatar
    Dave Reply March 10, 2012 at 10:54 AM EST

    Amen to that !

    • avatar
      Dave Reply March 10, 2012 at 10:55 AM EST

      in reference to:

      The U.S.government should stop interfering with energy markets and let the United States achieve energy independence the old fashioned way – through the free market and American private-sector ingenuity.