When Y.E. Yang beat Tiger Woods in a head-to-head battle to win the 91st PGA Golf Tournament last Sunday, it was the first major golf tournament won by an Asian. As golf pundits began to talk about the celebrations that will take place in Yang’s home country of Korea, I began to think about just how many golfers the Asian countries would field in 10 years simply as a result of Yang beating Woods. As someone obsessed with energy issues, I then started thinking about how many Asians may be driving a car to golf courses.
In June of this year China’s auto sales increased by 36.5% over the prior year to 1.14 million units. In the first half of 2009, total auto sales rose 17.7 from a year earlier to 6.1 million units. At this rate, China will overtake the U.S. as the world’s largest auto market this year.
The vast majority of these vehicles are powered by gasoline. One might expect a car like the Toyota Prius (TM) to be selling like gangbusters in China. This is not the case. Various Chinese policies have pushed up the price of a Prius to $36,500 in that country and Toyota now expects to sell only 1,000 to 1,500 of the cars in China this year.
By comparison, the cost of a Prius in the U.S. is around $23,500. In the first half of 2009, over half of Toyota’s 1.2 million Prius sales worldwide were sold in the U.S.
The point here is that China appears headed to duplicate America’s love affair with the gasoline powered automobile and its addiction to foreign oil. For a country with 1.3 billion people (1 billion more than the U.S.) the worldwide impact of Chinese automobile use is not hard to predict: Chinese oil imports will continue to surge and oil supplies around the world will tighten in the very near future.
The Chinese authorities have responded by securing oil deliveries from Brazil, Russia, Venezuela, and other oil exporting nations around the globe. They certainly have the financial wherewithal to do so.
However, surely the Chinese must realize American economic, environmental, and national security vulnerabilities to foreign oil addiction. Why would they set the stage in China to repeat glaring U.S. energy policy mistakes? What is China doing to combat foreign oil addiction? In particular, what is the status of natural gas transportation and policy in China?
Here are some bullets from a 2006 article by Guan Saw, of Cummins Westport, Inc:
- China has more than 240,000 NGVs (U.S. has 120,000)
- Over 720 CNG refueling stations (U.S has 1,100 – half are public)
- Comparatively low conversion costs (U.S. has high conversion costs)
- Government initiated training programs and subsidies
- Natural gas is only 2% of China’s total energy consumption
- China has abundant natural gas reserves
- Beijing Public Transit owns a CNG fleet exceeding 2700 units
- Xi’an had 27 CNG stations in 2004; with government support, Xi’an had 50 stations by 2005
- The Chinese National Clean Auto Leading Group is setting standards and regulations for NGVs, refueling stations, and leading research.
So, it looks like the Chinese government is supportive of natural gas transportation, but China’s big problem is lack of natural gas infrastructure. That is, the lack of pipelines to distribute natural gas to and throughout its populous eastern cities. The U.S. on the other hand has the most distributed natural gas pipeline grid of any country on Earth: its 2.2 million miles of pipe connecting every major metropolitan city and 60,000,000 American homes. Let there be no doubt:
The natural gas pipeline grid in the United States combined with abundant natural gas supply is the most strategic energy, economic, and industrial advantage the U.S. holds over every other country on Earth – including and especially China.
Now if we would only leverage this huge advantage! Does anyone really believe the Chinese would not take advantage of this strategic advantage were the roles reversed? Of course they would! If the Chinese had the natural gas pipeline grid and supply the US has, they’d have a Phill in every garage, 10,000 CNG stations, and they’d be making NGVs by the hundreds of thousands.
Yet despite this huge strategic advantage:
- U.S. Energy Secretary Chu is “agnostic” about natural gas transportation(!)
- President Obama has not embraced natural gas transportation and is completely silent
- The EPA, which should be pounding the table for natural gas transportation, has instead been the biggest constructor of NGV roadblocks
- You cannot purchase a Phill or a Honda Civic GX in most states
So, although the Chinese are following the wrong-headed footsteps of the U.S. when it comes to gasoline powered automobiles and foreign oil addiction – at least they have an excuse (the lack of robust natural gas pipeline grid). They give an eye-tooth for the natural gas pipeline grid the U.S. has.
Things aren’t much better on the coal front. China is now the world’s leading producer and consumer of coal:
These charts are based on 2005 data. For a more current and in-depth report on worldwide coal consumption, please read this report by the EIA (pdf warning).
Again, I doubt the Chinese would be planning to build all the coal fired plants they have on the table now if they had the natural gas supplies and distribution system that exists in the U.S. But they don’t, and they need power, and they are going to again follow wrong-headed U.S. energy policy.
But what is the excuse in the U.S. to keep burning coal? I sent a letter to the Knoxville, TN newspaper recently (it was printed in Sunday’s edition) and said that all the investigations and of how and why the TVA’s toxic fly-ash spill at Kingston happened and what they can do to prevent future releases of toxic coal remnants is missing the point.
The real question is: why are we still burning coal when we have a fuel that emits 50% less CO2, has none of the toxic particulates that were released into the Emory River during the disaster (and then the TN river, and then…etc. etc.), is cheaper, and abundant? After all, we know how the disaster happened: the TVA wants to generate electricity as cheaply as possible and the EPA doesn’t protect the environment.
It’s as simple as that. Making matters worse is an administration headed by Obama and Chu both of whom repeat the myth of “clean coal” as often as humanely possible and are going to spend billions of tax-payer dollars to prove that “clean coal” is indeed a myth and an oxymoron. I guess some folks think if they repeat something enough times it will make it so.
So how should an American investor invest given these realities? Well, first off, it is my feeling that:
- Oil will be in more-or-less a permanent contango situation for the rest of history. That is, in general the price of future oil deliveries will be higher than current spot prices from here on out.
- The historical oil to natural gas price ratio is no longer valid. Natural gas is abundant and cheap, and the opposite is true of oil
You can blame these trends on peak oil, but the term peak oil usually brings on partisan debates I’d rather not get into here. The reality is simply that worldwide oil supply will not keep up with worldwide oil demand in the very near future (and I haven’t even mentioned India or the rest of Asia in this article).
People are wondering now, how in the world can oil be at $70/barrel when U.S. inventories are near 20 year highs? It must be speculation (wrong!). It’s simply because traders:
- Remember the supply/demand fundamentals of 2007/2008
- Realize big oil companies are for the most part scaling back E&P expenditures
- Realize the long-term oil consumption trends of China and India
- Realize the U.S. is doing nothing to get off foreign oil
- Realize oil is the one strategic commodity without which there can be no economic growth or even a functioning world economy.
- Oil is prices in U.S. dollars and the future trend for that currency is arguably down
- Realize oil wars and geopolitical risks must be factored into current and future prices
Now, the assumption behind points 1) and 2) listed above is that we have a functioning world economy, and this is quite a bold assumption. Obama appears more than happy to continue (and expand) the ruinous policies of the previous Bush administration:
a) Terrible energy policyb) Huge deficit spendingc) Government takeover and ownership of many economic sectorsd) And print as much of the U.S. currency as possible to pay for a) through c) above
Given these ridiculous policies, it is quite possible the U.S. economy, and the world economy for that matter, will struggle along for some years to come. In the long run, however, the extremely bullish fundamentals for oil prices will not be impacted even by slow economic growth. The only way to significantly change oil supply/demand fundamentals is for both the U.S. and China to embrace natural gas transportation.
However, I have just explained that China cannot do so (at least in the short term) and the U.S. simply refuses to do so (even though it could very easily make the transition).
So, it’s no surprise that I would suggest investors own a company that produces around 4 million barrels of oil a day (XOM), or around 3 million barrels a day (CVX), or nearly 2 million barrels a day (COP). How can an investor not own oil companies like BP and PBR that are increasing oil production while others can barely keep production from falling?
All these oil companies pay decent dividends – although XOM is very stingy considering their excellent balance sheet, efficiencies of scale, and humongous cash flow.
U.S. companies like Fuel Systems Solutions (FSYS) and Westport Innovations (WPRT) have their most robust growth perspectives outside the U.S. Perhaps if HR1835 get passed by Congress (I’d be shocked given the “leadership” in DC these days) the market for natural gas transportation in the U.S. will be bursting at the seams soon.
That said, the future for both these companies is bright as many countries around the globe apparently understand that reliance on foreign oil imports is a recipe for economic disaster even if the US does not.
Disclosure: the author owns COP and PBR.