The Digest looks at security and energy security
If you’re feeling somewhat nervous about global stability, you’re not alone.
This week, the head of Russian state intelligence service, Alexander Bortnikov, warned of a potential “invasion of Central Asia” by Taliban or ISIS forces.
And, the US and China are in a tense situation in the Pacific theater, where the US is sailing within the 12-mile international waters limit around Chinese installations built on top of reef atolls in the South China Sea.
Q: What do these two developments have in common?
A huge percentage of the world’s oil trade goes through the South China Sea, and ISIS control of some oil fields had put critical pressure on oil prices beginning last year. Bob Kozak, writing here, speculates that $10-a-barrel ISIS oil is responsible primarily for the global collapse of energy prices.
Meanwhile, the Wall Street Journal is reporting that “U.S. imports of foreign oil are rising again after a long decline, as the oil bust forces domestic producers to scale back.”
It’s true. The Energy Information Administration reports that, after a 20% decrease in crude oil imports between 2010 and 2014, imports rose 1.7% in Q2 of this year. More ominously, 4 months in a row.
Q. When will we know more on oil prices and energy security?
A; December 4th. That’s the next major OPEC meeting, in Vienna. Can OPEC maintain its strategy of focusing on market share, with prices remaining this low?
Q. What can the US do about it?
A: Given the current energy policy, not a darn thing, for now. Oil prices are set in a world market, and US producers have been dropping offline like flies while OPEC producers such as Saudi Arabia have maintained output and increased market share. Unless and until oil prices cross, roughly and in today’s dollars, the $65 threshold (where shale operations generally start to have acceptable financial returns), you can expect more and more imports, more and more loss of energy security.
But wait. There’s a policy shift that could have an impact. Or rather, a recommitment to the biofuels policy. Yes, US-produced biofuels are impacted by global oil prices but are not lockstep linked to them. And they fill the gap that shale has left. All the Obama Administration has to do is to enforce the targets that Congress set in 2007 in the Energy Independence and Security Act.
Q: The headache for the Administration in enforcing Congress-set targets?
A: After EISA was passed, no one put the infrastructure in to deliver the volumes to market. So, you have willing customers — as this poll shows. And, you have willing producers. But the flex-fuel cars that were produced were generally sold in states where few E85 pumps exist, and no manufacturer has said that any car they made before 2012 is well suited to E15 blending. And E15 pumps are incredibly hard to find.
One market looks a little better and that’s California, where Propel Fuels has tripled sales of E85 in the past year, though from a low base.
Q: When will crude prices cross that $65 threshold and stop the drain of dollars?
A: That’s a good question.
Forbes reports that “Along with the US, the rest of the non-OPEC supply will decline by 0.5 million barrels per day next year. Combined with growing global demand, this will lead eventually to upward pressure on oil prices. Wood Mackenzie sees the Brent oil price rising to the low-$70s/bbl in the second half of 2016 as these fundamentals shift.”
Q: What does the market say?
Not betting aggressively on a price recovery, that’s for sure.
The NYMEX futures price for West Texas Intermediate goes out as far as December 2023 — and that’s the month with the highest recorded price of any WTI futures contract. But it’s priced at $59.79 — that’s a far cry from $65.