Saturday, August 23, 2014

From hydrocarbon pricing to Utopia

Natural gas pricing seems to have run out of steam. I don’t think so, but many gurus claim that scenario to be true.  The North American energy revolution has been a game changer and will be so for decades to come.  You see the game has changed from peak oil to a North American hydrocarbon reserve life that potentially stretches out for well over a century; maybe even longer.  Consider also the fact that a few years ago ‘Gas Hydrates’ represented another enormous pile of hydrocarbon reserves. These hydrates were 'energy laying in waiting' but they came with the enormous environmental risk of becoming unstable and a subsequent mass release of methane into our planet’s atmosphere. Methane is one of the strongest greenhouse gases that we know and if anyone should become concerned about ‘global warming’ then it should be in the case of a massive release of methane.

As it turns out, we probably will have more than sufficient hydrocarbon reserves to have time to develop alternative energy sources. Geothermal energy; cosmic energy (energy captured in space) and hydro-energy are my long term favorites. But heck, we may make breakthroughs in Thorium or cold fusion – or whatever else. So with so much reserves, it is not scarcity of hydrocarbons that will set future pricing. It will be the weather and the natural exploration cycle of the oil and gas industry and the economy in general. I foresee a golden age of North America – in particular the U.S. with many of their citizens owning cool retreats in Canada;  say summer cottages and summer- instead of snow-birds). 

Canada is falling behind in the LNG export business and in the development of a hydrocarbon transportation system. We are becoming the victim of the U.S.' manipulation of environmental activists in British Columbia and other parts of our country; including U.S. stalling of the Keystone pipeline decision. Yes, we have a window of opportunity to export our excess hydrocarbons overseas to Asia and Europe; but our handwringing; our lack of political leadership and the manipulation of U.S. interests of the 'Globe and Mail reading', gullible masses close this window at an alarming speed.  Next year the Chenier facilities in the Gulf of Mexico are ready for LNG exports and there is a lot more to come; where is Canada?  While the Americans are pointing moralizing fingers at our oil sands, they rapidly readied themselves for hydrocarbon exports.  Canada is sleeping at the wheel!

But in the end, North America’s hydrocarbon pricing will be set by the weather!  Yes you saw it this winter with gas prices exploding when weather was cold and now in summer when the summer is relative cool with gas prices falling. Fuel for winter heating and for summer cooling!  Currently oil pricing is high enough to justify drilling for oil; but the oil drilling boom has driven up both oil and (associated) gas production to near historical peak levels.  Meanwhile trains and trucks and even some cars have converted from diesel and gasoline to natural gas as energy source; our electricity generation has not switched from coal to solar or wind but to natural gas. Thus, oil is gradually becoming more interchangeable with natural gas and with coal. The liberal favorite alternative energy sources are evolving into not much more than distant back-ups (at least in North America). Don’t write off coal from the energy supply as it is cheap and with ever improving scrubbing efficiencies it may regain its position as a socially acceptable energy source.  Also, do not forget the more environmentally friendly technology of converting coal into hydrogen which would allow an even more diverse means of energizing the transportation system.

In the future, oil and gas pricing will be determined by 3 main factors (in my mind):

  1.           Economic (and population) growth
  2. Weather
  3. Drilling cycle
With economic growth and increasing population growth and prosperity, the demand for energy will forever increase. As soon as prices fall we will find ways to use more energy. The weather determines heating and cooling and thus fuel demand; this was once again shown last winter. Weather will also affect economic growth and thus in turn energy demand. The oil and gas industry is cyclical; it will drill up a storm if oil or gas prices make it economically attractive to do so; up to the point that there is a temporary oversupply and consequently prices fall below the costs of production and drilling comes to a halt. Then the cycle repeats.

No longer will political instability and local wars combined with the fear of insufficient supplies set pricing.  Middle Eastern and Russian war mongering will become increasingly unimportant. The Muslim population will have to learn to co-exist peacefully amongst themselves and forget about settling sectarian differences with violence. The Muslim population will have to learn to be tolerant towards different belief systems and adopt a less dictatorial and more democratic political system(s).  Regimes such as in Russia and in China will have to evolve allowing more freedom for its population. The Americans hopefully become less xenophobic and abandon the semi-fascist tendencies of their secret services including Homeland Security.  Yes the rest of the world is envious of the U.S., just like much of the Middle East is envious of the Israeli success story. It is easy for many fanatics to blame the U.S. for their woes. Woes that more often than not are to be blamed on the fanatics themselves and their social/religious structures. In the late 19th and early 20th Century South America was more affluent and successful than the North America.  The choice of political and legal system laid the basis of completely different economic and social performance for these two continents.

Right now, once again,  the U.S. is on the verge of veering of the path of its successful development. 9-11 has hastened the loss of freedom amongst its citizens. The fear of terrorism has developed a fortress mentality in the U.S. that may result in a more fundamentalist and ‘weltfremd’ society just like many Islamic societies did earlier in history. Brilliant and prosperous in medieval times, Islamic societies lost their prosperity and poisoned themselves resulting in the violence of today. They did so by restraining religious freedom and by pushing its population into a much more repressive environment.

What is the difference between Russia and the U.S. when persons and institutions get persecuted by the SEC, the IRS and the Justices department for political advantage or plain personal revenge as happened to Canada’s Conrad Black? Conrad Black, who got ultimately sentenced on a weak charge of obstruction of justice when caught on video carrying out some boxes from his office back door.  What is so great about the U.S. when they chase the Canadian children of U.S. born parents for ‘back taxes’ and failure to file a U.S. tax return?  Is this democracy in action or a power hungry political bureaucracy?  What is the difference between Russia's Gulag Archipelago and the U.S.' Guantanamo Bay Detention Camp?

With the Energy Revolution the U.S. and Canada have an opportunity to continue a path of leadership in the world and of true great prosperity. Currently, however, its much admired ideals of freedom are today rapidly exchanged for U.S. xenophobic attitudes and its anxious pursuit of ‘security’ that will threaten its potentially great future just like it did for Islamic societies during the Middle Ages.

Thus, if everything goes right, I see the oil and gas industry develop into a cyclical utility industry; just like companies such as Microsoft, Apple and Google are becoming technology utilities – ever growing and with a predictable revenue and profit profile. Just like Canadian Banks whose conservative nature makes them one of the most profitable segments of the stock market. Nothing is more profitable than predictable results – just ask Warren Buffett. Now, if we could only rein in those nasty repressive tendencies, short term thinking and war mongering politicians then the world would become a true Utopia. J

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