Energy sector increasingly bullish
Although I've made it perfectly clear that I'm not in the financial advisory business, nary a day goes by that I'm not asked about what is the latest hot stock in which to invest.
Having said that, I make no bones about the fact that I believe the global energy sector presents the greatest growth opportunities for the long-term pull.
After analyzing, researching and following the ebbs and flows of this oft-perplexing economic arena, there are several factors that make it almost certain a global supply/demand crunch is on the way.
This encompasses growing geopolitical problems, a lack of a meaningful energy policy in the world's No.1 energy consumer, the United States; and an inversion in the supply/demand equation facing a fast-growing global consumer sector.
Never have the opportunities looked so good for the energy investor and so glum for the consumer. The inherent flaws in the overall oil and natural gas picture, much of it needed to power the ever growing fleet of cars and trucks in the U.S., are as follows:
Inventory levels of gasoline have dropped to the lowest level in 50 years; reflecting a paltry 21 days of demand.
This is compounded by demand increasing 2 percent over last year, with inventories 7 percent below equivalent levels at the same time last year. Much of this is due to the failure of indigenous refineries. There have been no new oil refineries built in the U.S. in the past 30 years, while many are still inoperable after being damaged while in the path of hurricanes Katrina and Rita in the fall of 2005.
With many emerging nations now driving cars and trucks, the energy shortage is taking on global proportions. The International Energy Agency has forecasted that daily global demand for oil will increase by 1.8 percent, or 1.5 million barrels per day. This brings demand up to 86 million daily barrels, which the supply side will be hard-put to meet.
Mexico, a major oil provider to the U.S., has decreased its shipments by 5 percent year to year. Much of this is due to the previously reported implosion of the Cantarell field, the world's second largest. Its production had declined by 17 percent in March from year-earlier levels. Only stepped-up production in the nearby KZM field has reduced Mexican imports to more manageable levels.
Venezuela, another key exporter to the U.S., is diverting an increasing amount of its oil production to China and India. The Hugo Chavez dictatorship has nationalized its oil fields, ousting the multinational oil companies on which the U.S. depends. Nigeria, which exports 10 percent of America's light sweet crude oil needs, is in a state of internal turmoil after completing national elections that are being challenged by heavily armed rebels operating in oil producing areas.
Saudi Arabia, which has boasted its ability to ship up to 12 million barrels a day, now admits it will be hard pressed to maintain its current 9 million daily barrels. Although the Saudis are loath to admit it, expert geologists are concerned about the viability of the Ghawar field, the largest producing site in the world. Concerns have also been raised about two other of the Saudis' five gigantic oil production fields that make up the bulk of their overall production.
Natural gas is also under pressure. With much of the U.S. underground fields out of bounds due to federal restrictions, those available for drilling are rapidly being emptied with decline rates jumping from 14 percent in 1990, and now 31 percent annualized and rising.
With natural gas critical as a heating and cooling progenitor, the U.S. will be increasingly relying on liquid natural gas imported from a handful of exporters such as Russia, Venezuela, Qatar and Algeria, none particularly friendly to the United States. LNG American-based terminals are only in the embryonic building stage.
Unconventional gas sources such as coal bed methane now comprise 56 percent of gas supply, up from 22 percent in 1990.
With these trends increasingly tilting the risks in favor of the investor who participates on the supply end of the equation, it's becoming more likely the supply/demand disparity will favor the investor over the consumer in the future.
Although alternative energy source development will hopefully mitigate these problems, they will not make a major impact in the foreseeable future, thus making traditional energy sources more expensive and harder to come by.
Editor's Note: This article was previously published in the The Desert Sun in Palm Springs, Calif.
Morris R. Beschloss graduated from the University of Illinois' College of Communications in 1952 and won its first ever Distinguished Alumni Award. He has been a semi-weekly economic columnist for the Desert Sun for the past several years and writes for the pipe, valve and fittings industry, publishing two newsletters. He can be reached at email@example.com or 760-324-8166.