It Takes a Lot of Energy

For those of you who would prefer to listen:

Energy prices keep slipping. It’s a big deal in the continuing fight on inflation. The price for West Texas Intermediate (WTI) Crude Oil has declined 22% in the fourth quarter. It’s down 7 consecutive weeks, undercutting $70 a barrel at one point, the lowest since July. It sure looks like prices are going to stay low for a while. The 6-month time spreads continue to trade in contango. That suggests a global Oil glut through next Summer.

The price of Oil has completely erased the war premium built up after the October 7th attack on Israel, and then some. It’s really surprising considering what’s going on around the World. It sure seems like the Market is not that concerned about the war between Israel and Hamas expanding. Also surprising, the sell-off has come despite OPEC+ efforts to deepen production cuts into 2024. Saudi Arabia alone cut production by 1 Million barrels per day. It hasn’t worked, much to Saudi frustration. Russia and Iran have actually been increasing production, violating the imposed sanctions with seemingly no consequence. Sluggish demand from China combined with rising production in the US has also been a big driver for lower prices.

America now produces a record 13+ Million barrels of Oil per day. We export nearly 6 Million of it, also a record. The largest source comes from the Permian Basin in West Texas, producing over 5 Million barrels per day. You might be surprised to know that if the Permian were a country, it would be the 4th largest producer in the World. More Oil comes from the Permian than Iran, Iraq or the United Arab Emirates. Most of the Oil in America is the “light sweet” variety. It has a lower sulfur content with higher yields as it’s easier to refine. Light sweet crude leaves minimal residue during the refining process and is easier to distill and transport. It’s considered higher quality for producing gasoline, diesel, heating Oil and jet fuel. It’s also a much more stable supply than other regions. American Oil shipments to Europe and Asia have offset declines from OPEC+ supplies. 

All of this has resulted in lower prices at the pump. The average price for gas across the country hit $3.22 per gallon this week. That is the lowest on the year. There’s reason to believe it could even fall below $3 by Christmas for the first time since 2021. Lower energy prices have been a boon to the American consumer. It’s coming at a good time, ahead of the Holiday spending season. Less money is being sucked away by the gas pump, which means more to spend throughout the economic system. The November Jobs Report showed the unemployment rate fell back to a near-record low of 3.7%. The American Consumer keeps spending, and the Market likes it.

Remember when the White House tapped the Strategic Petroleum Reserve (SPR) to help fight inflation? That happened last year when the Biden Administration sold 180 Million barrels to bring down the price of Oil, which spiked when Russia invaded Ukraine. That was the largest SPR tapping in American History. It took it down to the lowest level since the 1980s. The barrels were sold at an average of $95 each. The SPR has capacity for over 700 Million barrels. It holds roughly half of that today. The good news is they’ve begun replenishing it. And they’re paying $70+ per barrel, yielding a $20 profit in that trade. That’s the good news. The bad news is they’ve only replenished 6 Million barrels. They’ve got a long way to go to replace the 180 Million. But the price is on our side, for now.

The geopolitical situation could change at any moment. The wars in Ukraine and the Middle East are beyond vulnerable to escalation, which could cause major supply outages. Something like that, no doubt, would result in spiking Oil prices. There’s also a relatively new issue brewing in the tiny South American country of Guyana. A recent discovery led by Exxon Mobil has found approximately 11 Billion barrels of Oil off the Guyana shore. It’s been a major boost for the Guyana Economy and its people. This week, its neighbor claims it’s there’s. Venezuela said it intends to seize the Oil-rich region. There’s a border feud. Both Brazil and the United States have come to Guyana’s aid, saying not-so-fast. The international community is largely behind Guyana. But certainly not all. Opportunists will no doubt come in to try to muck the waters. Pun intended. This is a new wildcard that could easily derail the lower prices. 

Oil’s role in the US Economy has shrunk over the decades as vehicles and heavy equipment have become more fuel-efficient and alternative energy sources have been developed. Oil accounted for nearly half of America’s energy consumption in the 1970’s. It is down to 36% today. Natural Gas is the primary energy source for America’s electric grid, at roughly 40%. Nuclear and Coal account for just under 20% each. Wind accounts for another 10%. The rest comes from other renewables like hydropower and solar. Renewables have been a growing source of energy in America. But it still pales in comparison to fossil fuels.

There’s been some serious pushback on the drive towards electric vehicles (EV). You’re seeing it both at home and abroad. It’s more than a political issue. Both Ford and General Motors said they plan to cut back their spending on EVs. Toyota plans to prioritize hybrids. This runs counter to the Biden Administration’s goal of having 50% of car sales be electric vehicles by 2030. There are a number of issues here. Demand doesn’t appear to be that strong in the United States. There’s also the issue of dependence on China for batteries. Could the existing grid even handle that many electric vehicles? Cold winters and hot summers also play a role. Californians were urged not to charge their cars during a scheduled power outage due to excess heat last year. That posed a problem, particularly in case of an emergency. It might not seem like it in California, but just 1% of cars on the road from coast-to-coast are electric. There’s a long way to go there. 

Out of curiosity, I looked up how much it costs to power up Disney World in Orlando. With over 1 Billion kilowatt hours of electricity, Disney’s Florida electric bill is over $100 Million per year. That blew my mind. Then, I looked up how much it costs to fuel commercial planes around the globe. Consuming over 90 Billion gallons of jet fuel this year, It costs over $270 Billion to fuel the global fleet of airlines in the friendly and not-so-friendly skies. It takes a lot of energy!

The future for American Energy can be viewed as a portfolio of solutions. It’s a multi-decade process. Renewable sources will continue to take on increasing roles and have become more competitive in cost. Reliable and cost-effective energy sources have always been essential for functioning and thriving societies. It’s also been a highly contested and controversial issue throughout history. Oil was the prize in the 20th century. Wars were fought over it. Global Power coveted it. Of course, alternative sources have been a focus of late. But one thing is still clear: The World still runs on Crude.

New York gasoline futures settled just over $2 a gallon on Friday. It’s driven by a growing surplus in the physical market. The country’s implied gasoline consumption has fallen to more than 200,000 barrels a day below seasonal norms while the supply has increased. The drop in futures means more downward momentum for retail gasoline prices, which have already fallen to $3.22 a gallon, their lowest point of the year. Prices are down by more than 15 cents from this time last year and are about 68 cents lower from mid-September’s peak, according to AAA. The price decline is a really good thing for consumers, as mentioned above. But the speed and trajectory of the consumption decline is also another recessionary sign that’s brewing. It’s clearly going to be a 2024 issue. That’s tomorrow. Today, the Market seems all about the now.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

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