Category Archives: Resource Constraints

Data Watch: US Natural Gas Monthly Production November 2013

The US government agency the Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on January 31st, and covers the period up until end-November 2013.

Data is reported in billion cubic feet (bcf). Key points:

  • November 2013 natural gas dry production: 2,047 bcf, plus 2.4% year-on-year
  • Average monthly production for the 12 months to November 2013: 2,020 bcf, +0.8% over the same period the previous year

Since the end of 2011, production growth has stalled (click chart below for larger image), with the year-on-year 12-month average bumping along a plateau.

US Dry Gas Production Nov 13 jpeg

Natural gas well-head prices exhibit seasonality, with winters generally seeing stronger prices due to heating needs. The recent polar-vortex induced cold snap in the U.S. has pushed prices up to their highest since February 2010 (here, click for larger image).

Natural Gas Spot Prices Jan 14 jpeg

To put the current price of $5.5 per million British thermal uni (Btu) in perspective, a longer term monthly time series going up until end December 2012 is given below (click for larger image). Note that natural gas production is very inelastic over the short term. Accordingly, the market is brought back into equilibrium during periods of strong demand through large jumps in price. However, these don’t generally prompt an investment surge in natural gas infrastructure since they are viewed as temporary in nature. Only if prices remain elevated beyond winter would we likely see a supply-side response.

US Nat Gas Well Head LT jpeg

Links for the Week Ending 26 January

  • The current oil narrative in the U.S. is one of bountiful supply but structurally reduced demand. Yet Mark Lewis, in The Financial Times, disputes the latter story (here, free registration at the FT). He argues that the last five years have seen a cyclical, not structural, shift in demand. But now that the economy is picking up speed, demand for oil is kicking up a notch. Given the astronomical capital expenditures needed to bring new supply to market, however, the only mechanism able to maintain equilibrium will be the rationing effect of higher prices.
  • Again in The Financial Times are some fascinating statistics showing that 26% of young adults aged between 20 and 34 now live with their parents in the U.K., up from around 21% in 1996. A prime mover behind this trend is the 13% decline in real median incomes for this age group in the decade from 2001/02 to 2011/12. All part of the new normal.
  • In my former job running a hedge fund, I learned one great skill that is rarely developed in the general populace; that is, to believe both the buy and sell case for any individual position. So does this mean that I was unable to trade, like a deer caught in the headlights? Not really, because sometimes (but not often) you rate the rationale behind one side of a trade as a little superior than the other—and that’s when you place your bet.  This approach can be extended to most things in life. So in the case of my recent series on technology and unemployment (starting here), I  looked at a series of papers that suggested we have a serious problem with technology. Given that bias, my inclination is to find intelligent people who say we don’t have a problem. One such person is the progressive economist Lawrence Mishel, who in a blog post last week argues that technology is not the job killer; rather,  low wages, inequality and unemployment are caused by other, non-technological factors. My understanding of this topic is highly fluid, with argument and counter-argument going on to my weighing scales. I tilt towards worrying, but am still very receptive to opposing views.
  • Of course, in the case of climate change, the scales are dramatically weighted to one side—i.e., bad climate change outcomes. Marginally encouraging is the fact that corporations are slowly comprehending climate change risk. As evidence, climate change has elbowed its way back onto the agenda at Davos. The Guardian is one of the few publications to pick up on this trend and has been tracking the various seminars, panel discussions and presentations there (herehere and here). And The New York Times has an informative article by Coral Davenport on how big business is getting more concerned over global temperature rise.
  • The Guardian also has a very interesting article on the impact of ENSO cycles (El Nino and La Nina cycles) on global mean temperature. What is new to me is the claim, which originates from a note in the academic journal Nature Climate Change (full article is behind a paywall), that the ENSO cycle itself will change as the planet warms, leading to more extreme El Ninos and thus more volatility in temperature variation. Yet again we learn of another source of climate risk.

Data Watch: US Natural Gas Monthly Production October 2013 Plus a Review of EIA’s Medium- and Long-Term Forecasts

Apologies for the late reporting of this number; my brain has been occupied with job-eating robots and computers for the last few weeks (and another post on this theme to come).

Apart from getting the latest monthly US natural gas number, I also want to do a quick catch up on The Energy Information Administration (EIA)’s “Annual Energy Outlook 2014″, which came out in mid-December and the “Short Term Energy Outlook” that came out on January 7th with new 2015 numbers.

But first the monthly number: the US government agency the EIA issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on January 7th, and covers the period up until end-October 2013.

Data is reported in billion cubic feet (bcf). Key points:

  • October 2013 natural gas dry production: 2,007 bcf, plus 0.6% year-on-year
  • Average monthly production for the 12 months to October 2013: 2,015 bcf, +0.7% over the same period the previous year

Since the end of 2011, production growth has stalled (click chart below for larger image), with the year-on-year 12-month average now flat-lining.

US Dry Gas Production Oct 2013 jpeg

Natural gas well-head prices exhibit seasonality, with winters generally seeing stronger prices due to heating needs. The recent polar-vortex induced cold snap in the U.S. has also been supporting prices over recent weeks (here, click for larger image).

US Nat Gas Spot Prices Jan 14 jpeg

To put the current price of $4.5 per million Btu in perspective, a longer term monthly time series going up until end December 2012 is given below (click for larger image). Continue reading

Links for the Week Ending 28 December

Apologies for my absence, but I have been super busy over the holiday period.

  • Liam Halligan in The Daily Telegraph explains why oil prices will likely remain high in 2014. It’s a well-worn story in this blog, but Halligan provides a nice recap on the disappearance of “easy oil”. In his words: “The ‘upstream’ oil industry capital expenditure has risen, in constant dollars, from $250bn in 2000 to $700bn last year – almost a threefold increase. Over the same period, global oil supply rose just 14%.” In sum, shale oil is no free lunch.
  • Staying with The Telegraph, Ambrose Evans-Pritchard gives praise where praise is due with respect to the Fed and QE. I still think that the uber-aggressive version of QE we have witnessed in the US will only be vindicated once it is unwound. The imbalances it is causing are many, but they have manifested themselves in asset inflation not generalised inflation. Nonetheless, with both structural reform and active fiscal policy missing in action during the Great Recession, it was left to the Fed to stop the sky from falling down—which is what the Fed did, so all kudos to them. The next question is: can the US growth without QE? We shall see.
  • Being ‘poorer than your parents’ is  a hot topic on both sides of the Atlantic. Bloomberg has a lovely article comparing a dad and a daughter, but the statistics on US savings and pensions levels are what shocked me most. How will those boomers live through retirement with that amount of money?
  • Over the pond (and less anecdotal), the Institute for Fiscal Studies (IFS) has just published a report looking at the economic circumstances of different cohorts born from the 1940s to 1970s. Conclusion: for the middle-aged, you have little chance of matching your parents prosperity in your later years unless you can nail down a significant inheritance. If you don’t want to read the whole report, you can see a good synopsis in The Guardian here, but almost all the UK national press, whether from the left or right, reported on the IFS study.
  • Previously in the Links, I flagged Larry Summers speech at an IMF symposium. Here he is again talking about long-term economic stagnation in The Financial Times.
  • I frequently mention the thought-provoking work of Tyler Cowen, and have just finished reading his latest book “Average Is Over“. David Brooks has a nice piece in The New York Times expanding on Cowen’s employment theme and thinking about what type of people can thrive as technology upturns the job market.
  • And last but not least, over to climate change. The Carbon Brief has a wonderful post on the five-most important climate change papers of 2013, including the key charts. Required reading for anyone who has bought into the idea that the current temperature hiatus has lowered the risk posed by climate change. But then again, such a reader would be unlikely to stray far from Watts Up with That.

Data Watch: Food Price Indices for November 2013

I haven’t looked at food prices for a number of months, so thought it time to revisit the benchmark indices.

The Food and Agriculture Organisation of the United Nations (FAO) releases a series of monthly price indices for a variety of food commodities (here) at the beginning of each month. The headline FAO Food Price Index is a composite of five food groupings: meat, dairy, cereals, oils and fats and sugar. The base 100 is the indexed averaged price for the 2002-2004 period. The November 2013 index number was released on December 5th. Key points are as follows:

  • The FAO Food Price Index averaged 2o6.3 for November 2013, almost flat since the summer but down 7.0 points from January.
  • The index was down 9.5 points from the 215.8 recorded in November 2012, or 4.4 percent
  • In inflation adjusted terms, the Food Price Index stood at 160.2 for November 2013 against the 2002-2004 base of 100

FAO Index Nov 2013 jpeg

Given the new land that has been coming into production and a general lack of adverse weather, I am quite surprised that the index has stayed so high. However, this is mostly due to strength in meat and dairy prices, both near their all-time records. By contrast, cereals are down 24% from their recent high in November 2012.

The FAO’s food price index is non-weighted, and so is a rather simplistic measure of food price inflation. By contrast, the World Bank issues a trade-weighted index of food prices which can be found in the quarterly Food Price Watch. Nonetheless, the broad story is similar, with food prices off their highs but showing no signs of returning to the levels seen a decade ago.

World Bank Food Price Index Nov 13 jpeg

Reuters reports that Macquarie has launched an even more useful index of agricultural futures prices whose weights are based on global consumption of each commodity. I expect that such a time series will only be open to those with a Bloomberg or Reuters terminal but will confirm this going forward. As reported by The Financial Times, the Macquarie analysts behind the index expect bumper harvests to weigh on food prices for the next year or so before a modest rebound takes place. A similar view comes out of the Economist Intelligence Unit.

While high prices have been encouraging more agricultural investment (buttressing the old saw that the cure for high food prices is high food prices), the  joker in the pack remains extreme weather.

Agriculture will always be cyclical since high prices beget supply, which brings down prices, which in turn reduces supply and so on and so on. With climate change, however, weather will be far more volatile, so making the timing of the agricultural investment cycle much more difficult. The net effect will be to keep long-term average prices higher than they otherwise would have been (as farmers need a greater return for greater risk).

With this in mind, plus the fact that the prices of fossil-fuel related inputs into agriculture also remain elevated, I see no likelihood that food prices will return to their 1990s inflation-adjusted levels. We are more likely to witness new food price index records as the decade progresses, but perhaps not just yet.

Data Watch: US Natural Gas Monthly Production September 2013

The U.S. government agency The Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on December 12 and covers the period up until end-September 2013.

Data is reported in billion cubic feet (bcf). Key points:

  • September 2013 natural gas dry production: 1,989 bcf, minus 0.2% year-on-year
  • Average monthly production for the 12 months to September 2013: 2,014 bcf, +0.8% over the same period the previous year

Since the end of 2011, the rate of production increase has rapidly decreased (click chart below for larger image).

US Dry Gas Production Sep 13 jpeg

The uptick in natural gas prices associated with the rapid deceleration in natural gas production growth has, rather surprisingly, rolled over, probably due to the increased competitiveness of coal. Prices paid by electricity utilities are back near $4 (I prefer this indicator since ‘well head’ prices are reported with a large lag). This price level is unlikely to sustain a new round of rig investment.

NatGas

Much recent media attention has centred on a so-called shale-gas revolution in the United States and, in particular, the ability of shale gas to boost overall volume of natural gas production. Many claims are made with respect to the prospective expansion in shale gas production in the coming years including the following:

  • Shale gas will provide a low-cost source of natural gas, and thus cheap energy, for decades to come. This, in turn, will boost the competitiveness of the U.S. economy.
  • The U.S. will move toward an era of energy self-sufficiency, which will help buttress the country’s geopolitical security.
  • The scale of shale gas production will be sufficient to allow the U.S. to commence natural gas exports, thus transforming energy markets outside of the U.S. such as those in Europe.
  • Increased natural gas production in the U.S. will mitigate carbon emissions through displacing coal and so reduce the risk of dangerous climate change.

I have blogged extensively on these claims (some repeated by President Obama) hereherehere and here.

For these claims to be substantiated, significant year-on-year rises in U.S. natural  gas production will be required over an extended period. Through tracking monthly production of natural gas, a non-specialist can confirm or refute whether large rises in natural gas production are being achieved and, therefore, whether the claims associated with a shale-gas revolution are credible. In short, the monthly numbers allow you to evaluate the hype. Monthly data are currently not showing any material increase in production.

Data Watch: US and Global Crude Oil Monthly Production November Releases

On November 27th, the U.S. government agency The Energy Information Administration (EIA) announced provisional U.S. crude oil production figures for September 2013. Key points:

  • September crude oil production was 233.8 million barrels, equivalent to 7.8 million barrels per day (bpd)
  • Change over September 2012 on a barrel-per-day basis: +18.6% y/y
  • September total crude oil plus natural gas liquids reached 315.0 million barrels, equivalent to 10.5 bpd

As can be seen from the chart below (click for larger image, link to original data here), the fracking of tight oil formations in the U.S. has made a major impact on U.S. crude production over the last few years. The critical question is whether the current large year-on-year percentage growth rates in oil production can be sustained. On the current trajectory, the US is set see production pass its peak of the 1970s.

US Field Production of Crude Oil jpeg

Growth rates for both crude oil production by itself and crude plus natural gas liquids remain robust, continuing to track in the high teens. The situation for oil is in marked contrast to that of U.S. natural gas, where production growth has stopped.

The differentiator here is price. Both tight gas and tight oil are expensive to produce compared with the conventional alternatives. Accordingly, production investment requires a high product price to remain feasible. U.S. natural gas prices are down roughly by half from their average level in the 2005 to 2008 period (removing the temporary 2008 spike). By contrast, the price of West Texas Intermediate, the U.S. benchmark oil price, remains near all-time highs (again excluding the very short-term 2008 spike).

Given crude oil is a globally traded commodity, U.S. production numbers need to be placed in the context of world supply and demand. In its latest Oil Market Report dated 14 November 2013, the International Energy Agency (IEA) recorded global ‘all liquids’ production of 91.8 million bpd for October 2013.

OPEC and Non-OPEC Oil Supply jpeg

Full quarterly IEA world supply-and-demand figures, including Q3 2013 supply estimates, can be found here.

Prices have eased in recent weeks after the threat of a military strike against Syria was removed. Moreover, the detente between the US and Iran has also opened up the prospect of more Iranian crude coming on to global markets in 2014.

The Red Queen, Rigs and Shale Gas

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” 

Lewis Carroll’s “Through the Looking Glass” captures the challenges of shale gas production well: technology must advance ever faster purely in order for production to stand still. Why? Because you are for ever depleting relatively easy-to-exploit resources and replacing them with ever more difficult-to-exploit resources. Yet the US government’s Energy Information Agency says we will run faster. Here is their long-term forecast from the Annual Energy Outlook 2013.

Nat Gas Production 2040 jpeg

But notice that  the EIA sees production moving sideways for a few years. From their Short-Term Outlook:

US Natural Gas Production Oct 13 jpeg

I’ve reproduced these charts before, but a couple of weeks ago the EIA produced a fascinating report (composed of charts but no text) showing production of new and legacy shale gas wells. It also covered tight oil but I wish to leave that discussion to another time. Now the shale gas producing areas have entered the business lexicon if you ever read the financial press, but as an aide-memoire here they are geographically (click for larger image): Continue reading

Data Watch: US Natural Gas Monthly Production August 2013 and Long-Term Outlook

This month, I will take a quick look at both the natural gas (including shale) price and production forecasts of the U.S. government’s Energy Information Administration (EIA) going out to 2015 and beyond to 2040.

But first, here is the latest monthly data release made on October 31, which covers the period up until end August 2013. Data is reported in billion cubic feet (bcf) wit a two-month lag. Key points:

  • August 2013 natural gas dry production: 2,080 bcf, plus 2.7% year-on-year
  • Average monthly production for the 12 months to August 2013: 2,018 bcf, +1.3% over the same period the previous year

Since the end of 2011, the rate of production increase has rapidly decreased (click chart below for larger image).

US Dry Gas Production August 2013 jpg

What is more, the EIA, in it’s latest Short Term Energy Outlook publication issued in October, sees no major change in production out to the end of 2014:

EIA Short Term Energy Outlook jpeg

The continuation of the status quo into the near future also applies to price, with respect to which the EIA sees only a marginal upward drift through 2014.

Nat Gas Prices Oct 13 jpeg

Going out far longer into the future, the EIA is a lot more optimistic over production growth. The EIA’s Annual Energy Outlook publication released in April 2013 sees the current hiatus in production growth ending mid-decade and steady growth thereafter. As a result, the US moves from being a net importer of natural gas to being a net exporter.

Nat Gas Production 2040 jpeg

A couple of critical caveats are in order here. First, of the 3.6 trillion cubic feet of natural gas exports forecast for 2040, the majority is predicted to be piped across the border to Mexico. LNG exports, meanwhile, are expected to commence in 2016 and grow to 1.6 trillion cubic feet by 2040.

To put this in perspective, UK LNG imports alone totalled 1 trillion cubic feet in the first six months of 2013 (see here). True, the fact that the US ceases to import natural gas frees up overseas supplies to be redirected elsewhere, but while the net change of around 5 trillion cubic feet from import to export is material, it is not a “game changer”.

To illustrate this, the EIA sees China’s natural gas consumption expanding from 3.8 trillion cubic feet in 2010 to 17.5 trillion cubic feet in 2040, a large chunk of which will come from imports.

Nat Gas Consumption jpeg

In addition, for the US production growth to materialise, the EIA realises that price has to rise. In short, the US natural gas story is one of cheap-to-produce conventional gas being replaced by expensive-to-produce shale gas.

Nat Gas Production by Type jpeg

And that can only happen if the price of gas goes up, which is what the EIA expects to happen.

Nat Gas Price 2040 jpeg

This merry and complicated dance between price and production is what led to Peter Voser, outgoing CEO of Shell, admitting to The Financial Times that the company’s investment in unconventional oil and gas production had not turned out as planned (see here). However, in order for the EIA’s forecast of a return to production growth around 2015 to come true, investments have to be made. And such investments will only be made if they are predicted to be profitable. That means either one of two things must happen: technology must bring costs down considerably or prices must go up.

As regards technology, we are in rather a ‘Red Queen’ situation in that we must run ever faster just to stand still. The reserves remaining to be exploited grow ever more complex and remote by the day. So we need technological improvements to compensate for the rising inherent costs in the difficult reserves we are next to exploit – let alone bring incremental increases in production.

Meanwhile, price rises require a robust economy. If GDP is expanding, a country can afford to apportion more expenditure to energy. If GDP growth is anaemic, it can’t. (I am putting to one side all the implications for climate change here.)

Of course, the EIA must, by its nature, sound a somewhat optimistic note with respect to the future. Further, it is true that unconventional oil and gas production jumps did stop the Great Recession morphing into a Great Depression Two. Nonetheless, the jury is still very much out over whether shale will disappoint.

The pessimistic scenario is one where we do get energy price rises as the EIA predicts but without production growth. This combination would put the global economy back into recession by decade end. Let’s see which story the incoming numbers support.

Data Watch: US Natural Gas Monthly Production July 2013

The U.S. government agency The Energy Information Administration (EIA) issues data on U.S. natural gas production, including shale gas, on a monthly basis with a lag of roughly two months. The latest data release was made on September 30 and covers the period up until end July 2013.

Data is reported in billion cubic feet (bcf). Key points:

  • July 2013 natural gas dry production: 2,077 bcf, plus 1.9% year-on-year
  • Average monthly production for the 12 months to July 2013: 2,012 bcf, +1.3% over the same period the previous year

Since the end of 2011, the rate of production increase has rapidly decreased (click chart below for larger image).

US Dry Gas Production July 2013 jpeg

The rapid deceleration in natural gas production growth has led to an uptick in prices over the last 12 months. Prices paid by electricity utilities have now reverted to between $4 and $5 dollars per thousand cubic feet from a low of less than $3 in April 2012. At some stage, rising prices should lead to a further investment in shale gas production, but this has yet to be seen.

Natural Gas Price jpeg

Much recent media attention has centred on a so-called shale-gas revolution in the United States and, in particular, the ability of shale gas to boost overall volume of natural gas production. Many claims are made with respect to the prospective expansion in shale gas production in the coming years including the following:

  • Shale gas will provide a low-cost source of natural gas, and thus cheap energy, for decades to come. This, in turn, will boost the competitiveness of the U.S. economy.
  • The U.S. will move toward an era of energy self-sufficiency, which will help buttress the country’s geopolitical security.
  • The scale of shale gas production will be sufficient to allow the U.S. to commence natural gas exports, thus transforming energy markets outside of the U.S. such as those in Europe.
  • Increased natural gas production in the U.S. will mitigate carbon emissions through displacing coal and so reduce the risk of dangerous climate change.

I have blogged extensively on these claims (some repeated by President Obama) hereherehere and here.

For these claims to be substantiated, significant year-on-year rises in U.S. natural  gas production will be required over an extended period. Through tracking monthly production of natural gas, a non-specialist can confirm or refute whether large rises in natural gas production are being achieved and, therefore, whether the claims associated with a shale-gas revolution are credible. In short, the monthly numbers allow you to evaluate the hype. Monthly data are currently not showing any material increase in production.