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Lowell Tuttle
I just wanted to post a link to this article, but my paste loaded it here...so disregard if not interested. Four views on the Energy Market...
WHITHER OIL
The surge in prices has some rethinking oil’s future. Steve Gonzales / Staff photographer
Tom McNulty is a managing director of the Houston-based Chiron Financial.
Karr Ingham is the economist for the Texas Alliance of Energy Producers.
M. Ray Perryman is CEO of The Perryman Group, an economic analysis firm in Waco.
Danielle Patterson is a partner at the Houston office of Vinson & Elkins.
Jon Shapley / Staff photographer
Some are calling for a ramp-up in domestic production to offset a volatile global market.
Steve Gonzales / Staff photographer
Oil prices have been on a roller coaster ride since 2020 amid COVID shutdowns.
The Russian invasion of Ukraine and the threat to energy supplies has not only sent oil soaring to prices not seen in more than a decade, but also prompted — at least for now — a rethinking of oil’s role in the energy mix as the world attempts a transition to low- and no-carbon alternatives.
Even political leaders who have championed a faster shift from fossil fuels, including President Joe Biden, are urging producers to pump more oil as prices surge in in global markets and at gasoline pumps. So where does oil go from here?
We asked four experts, petroleum economist Karr Ingham; energy analyst Tom McNulty; economist Ray Perryman; and energy attorney Danielle Patterson to weigh in on the question.
Let markets do their work
Crude oil markets have been generally chaotic since early 2020 when COVID turned the economy, energy demand, and the U.S. oil and gas industry upside down. Demand fell deeply and rapidly, leading to sharp declines in production.
The recovery of that lost production has lagged demand growth, pushing prices higher in late 2021 and early 2022 to levels not seen since 2014.
And then Russia, the world’s second-largest crude oil producer, invaded the Ukraine, potentially jeopardizing significant global supply, pushing prices even higher to levels not seen since the record prices in 2008. In other words, even as COVID was still raging as an energy market event, the Russian invasion was piled on top of that — making matters even worse.
As crude oil goes, so goes gasoline. Gasoline price levels that had become uncomfortable pre-invasion have become something closer to painful post-invasion. While I hope I am wrong about this, that situation may well get much worse before it gets better.
So, what does all this mean in the near term and the longer term, and where are we headed from here?
First, let’s suppose the Russian situation is resolved tomorrow, that Russian production and exports are maintained at pre-invasion levels. That still leaves us with post-COVID economic recovery and energy demand outpacing supply — the circumstances that existed pre-invasion and a recipe for continued rising prices. Prices were primed to go higher in 2022 even had the invasion not happened.
The Russian situation is not going to be resolved tomorrow. That puts Russian supply to the global market at risk. The International Energy Agency (IEA) last week suggested that Russia could lose 30 percent of its oil output in the coming few weeks.
If that happens prices will likely soar well beyond levels ever seen before. Unfortunately, consumers will suffer at the pump to a corresponding degree. Put another way, it is at least possible that the fallout from Russia’s actions on top of an already undersupplied market may lead to crude oil and gasoline prices in 2022 that are bordering on the unthinkable.
The only path out of this mess is to increase global supply as rapidly as possible. This is what dramatically higher prices would be doing their best to incentivize. Outside of the United States, there are few places from which this additional supply can come — maybe a bit from OPEC, mostly from Saudi Arabia and the United Arab Emirates if that.
In the near term, most regions of the U.S. are not primed to provide significant additional supplies in 2022. The exception is the Permian Basin, which provides a whopping 6.5 percent of all global crude oil production. The Permian has already recovered its COVID-induced production losses and is now producing at record levels. The rig count is climbing, and will likely gain momentum going forward thanks to higher prices that make drilling and producing much more attractive.
When consumers are paying painfully high prices for gasoline and other end-use energy products, it is difficult to remember that markets and higher prices are at work on their behalf. And yet that is exactly what is happening.
Record-high prices in 2008 set the stage for an unprecedented and unexpected explosion of U.S crude oil production that pushed prices much lower. That can happen again if markets and prices are allowed to do the work of re-establishing an abundant and affordable supply of energy from right here at home for years to come.
Old energy can boost new energy
A good place to start is always the fundamentals of supply and demand.
In terms of supply, crude oil reserves are still very large. The International Energy Agency estimates that there are 1.6 trillion barrels of oil across the globe. In the United States, the Energy Information Administration estimated 38.2 billion barrels of proven oil reserves at the end of 2020.
In terms of demand, the picture is more complex. The developed world is experiencing flat or single-digit growth rate for crude oil demand, while the developing world is seeing meaningful demand growth. About 90 percent of global oil demand growth is from Asia, according to the IEA.
The table is set for a new era for oil, based on these themes.
First, Asia creates a natural hedge that underpins crude oil demand. The developing world has shown little appetite thus far for strict adherence to the various climate frameworks as governments in developing economies seek affordable economic growth and a higher standard of living.
While the growth of electric vehicles will affect the demand for oil and refined products in the developed world, it remains to be seen how fast and far EVs can expand in developing countries.
Second, the war in Europe highlights the importance of energy security and diversification. The U.S. oil complex presents the right combination of technology innovation, ESG, or environmental, social and governance considerations, capital discipline, and skills that mean it can and should take market share.
This will help to stabilize global oil markets from disruptive geopolitical shocks. Investors will have a heightened awareness of capital flowing to regimes that are not good actors because of their increasing focus on ESG.
Third, there is an often-overlooked point about oil and the energy transition. Oil can fund a great deal of the energy transition. Cash flows from crude oil are already being deployed by large energy companies to fund the development of clean and renewable energy.
There is a growing push here in the U.S. for the certification of “green barrels,” meaning oil produced from wells that have very tight air and water controls on them. Also, while the oil industry may not agree, many of the historical investors in oil and gas presume that oil will largely disappear as a transportation fuel in the next decade, and they are therefore concerned about “terminal value” or the ability to recover their investments in later years.
U.S. shale drilling, with its much faster recovery of capital is far more appealing than the near-decade long capital recovery periods for many potential international oil and gas developments. Any effort to fill the gap between demand and constrained supplies may depend largely on U.S. oil and gas companies and their ESG-conscious investors.
Both need to be on board. Old energy can be a source of capital for new energy.
So, what does it mean? The ESG movement will mean that better players or stewards in the oil business will draw capital away from bad players. Mergers and acquisition in the oil industry should accelerate as companies shuffle assets and the sector consolidates.
I expect more capital to flow back into the U.S, oil business for all these reasons. It is already happening.
Oil prices are touching an altitude not seen since the spike in summer 2008, pushing gasoline prices into uncharted territory and raising other costs in their wake. The situation in Ukraine and efforts by financial markets to predict it are driving the immediate spurt in prices.
But even before Russia invaded, prices were trending upward as the global economy rebounded from COVID-19 and demand rose faster than supply.
Russia is the third-largest producer of oil (after the United States and Saudi Arabia), and the military action raises the potential for supply disruptions. In addition, because oil and natural gas are the mainstay of the Russian economy, some countries, including the United States, are just saying “no.”
This action is effective in decreasing financial resources supporting Russian aggression, but it also takes a significant portion of the global supply of fuels off the market.
The geopolitical risk of relying on Russian energy has become readily apparent, and measures should be taken to permanently mitigate the situation. The only practical path toward true energy security for the foreseeable future is supporting the development of oil and gas resources even as we address very real climate issues and foster renewable energy development.
Facilitating increased supply is also the optimal mechanism to keep prices in check over an extended period.
Supply responses have lagged for myriad reasons, ranging from OPEC policy to financial recovery of firms devastated by the pandemic-driven price collapse in 2020. There have also been challenges raising capital for small and medium-sized energy firms (driven in no small measure by climate-oriented requirements and policy pronouncements). Various federal policies have hampered development, discouraged capital formation, and raised perceived risks of future exploration and production.
Simply stated, it’s time for a reality check. Renewables are critical to meeting climate goals and must expand rapidly, but they can be implemented neither rapidly enough nor with adequate consistently to meet global requirements. In fact, the Department of Energy’s baseline forecast reveals the need for a 35 percent increase in petroleum resources by 2050, even as renewables almost quadruple.
It’s incontrovertible that conventional fuels burned cleaner will be essential, and the Permian Basin has by far the lowest carbon footprint among the world’s major onshore fields. Until there is greater acceptance of this inescapable fact, we’ll see production grow slower than necessary, with the inevitable outcome being higher prices, greater uncertainty, and increased geopolitical risk.
Rather than stifling the domestic industry, we should advance the technologies to burn conventional fuels cleaner. As the current disruption has brought home, it is imperative that this shift happen now.
The energy transition is still coming
Recent events in Ukraine have reminded us once again of the central role energy plays in the world’s economies. Whether it’s to focus more critically on energy security or build sustainable solutions, the world needs affordable and available energy to create progress.
Today, there is no shortage of debate around the move to cleaner and renewable sources of energy. The energy transition has become one of the most important global economic shifts affecting nearly every industry, government, and local community. Perhaps it’s time we take Voltaire’s advice and not let perfect be the enemy of good.
The reality is that the global population is set to grow by some 2 billion people by 2050 and global energy demand is expected to increase 47 percent in the next 30 years, according to the Energy Information Administration. With that pace, barring an incredible technological breakthrough, we need both our existing energy system and technologies, as well as continued investment in new energy sources and technologies, just to keep up with world demand.
Fortunately, renewable capacity is forecast to accelerate in the next five years, accounting for almost 95 percent of the increase in global power capacity through 2026, according to the International Energy Agency. That inflection point began a few years ago when investors and institutions began driving dynamic change. We know this from the work we have done at Vinson & Elkins advising on renewables projects in 44 of the 50 U.S. states in the past decade, with a total transaction value in excess of $100 billion.
This momentum has been driven by a capital intensive push, which is helping to improve competitiveness from upstart ventures to upstream petroleum stalwarts.
As the world moves toward a low carbon future, traditional energy companies are not sitting idle. These companies are working to be a major part of the solution, integrating carbon reduction solutions such as renewable power, carbon capture, bioenergy, and hydrogen, into their existing businesses.
One example is Continental Resources. The company recently announced that it is committing $250 million over the next two years to help fund the development and construction of new carbon capture, transportation, and sequestration infrastructure, while also leveraging its operational and geologic expertise to help ensure the safe and secure storage of CO2.
We also know that industries are disrupted by innovation. We’ve seen this from watching other industries where venture capital has helped fund the future of so many new ideas. One example of this is Houston’s first climate-tech and cleantech-focused incubator — Greentown Houston Labs.
Affordable energy has always been the catalyst for progress — in Texas, across the U.S., and around the world — and it continues to be an essential tool in helping lift communities, industries and nations. Progress isn’t perfect, but the energy transition has room for all participants to move us in a path forward.
Karr Ingham is the economist for the Texas Alliance of Energy Producers. Tom McNulty is a managing director of the Houston investment bank Chiron Financial. M. Ray Perryman is CEO of The Perryman Group, an economic research and analysis firm in Waco. Danielle Patterson specializes in energy as a partner in the Houston office at law firm Vinson & Elkins.
“Simply stated, it’s time for a reality check.”
Ray Perryman, CEO of Waco-based The Perryman Group
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