I am medium and long term bullish on oil. I believe it is a matter of simple mathematics. The decline rates in production from giant oil fields discovered decades ago are simply too large to overcome in order to grow production significantly every year. And oil demand continues to increase as the number of people on earth increases and the per capita consumption of oil increases as emerging economies develop.
What I haven’t been however is bullish natural gas. But I am starting to lean that way. I recently read Exxon Mobil’s (XOM) 2012 Energy Outlook which has gotten me closer to being convinced that natural gas demand is about to enter a long steady growth trend.
Below are 13 conclusions which Exxon reached and included in the above linked report:
1) Global energy demand will be about 30 percent higher in 2040 than in 2010, as economic output more than doubles, and prosperity expands across a world whose population will increase to nearly 9 billion people.
2) In developed countries (North America and Europe) energy use will remain essentially flat even with economic growth and higher living standards.
3) In non-OECD countries energy demand will grow by close to 60 percent. China’s surge in energy demand will extend over the next two decades and then gradually flatten as its economy and population mature.
4) In other non-OECD countries billions of people will be working to advance their living standards which means they will require more energy. The need for energy will make electricity will remain the single biggest driver of energy demand.
5) By 2040 electricity generation will account for more than 40 percent of global energy consumption.
6) Demand for coal will peak and then begin a gradual decline because of emerging policies that will seek to curb emissions by imposing a cost on higher-carbon fuels.
7) Use of renewable energies and nuclear power will grow significantly.
8) Oil, gas and coal will continue to be the most widely used fuels and have the scale needed to meet global demand making up 80% of total energy consumption in 2040.
9) Natural gas will grow fast enough to overtake coal for the number two position behind oil. Demand for natural gas will rise by more than 60 percent through 2040.
10) For both oil and natural gas an increasing share of global supply will come from shale formations.
11) Gains in efficiency through energy saving practices and technologies like hybrid vehicles and new high-efficiency natural gas power plants will temper demand growth and curb emissions.
12) Global energy-related carbon dioxide emissions will grow slowly, then level off around 2030.
13) In the United States and Europe where a shift to less carbon-intensive fuels such as natural gas is already under way, emissions will decline through 2040.
I don’t think Exxon is going out on a limb in predicting continued increases in energy consumption globally. In fact Exxon is pretty conservative with respect to energy consumption growth when you consider all of North America and Europe are expected to remain at current levels.
At current commodity prices natural gas is being priced on an energy equivalent basis at about $20 per barrel of oil. Oil is selling for almost $100. At some point this price disconnect is going to drive changes in behavior that result in the substitution of natural gas for oil wherever possible. Think natural gas as a transportation fuel.
As electricity demand grows and there is a choice available between natural gas and coal for power generation, concern for the environment surely will lead to more and more natural gas driven power plants.
Considering all of this it does seem quite likely that natural gas may well be the fuel of the next few decades. What gives me pause is that if I invest heavily in natural gas weighted investments now I really could be five years early to the party. And there is really not much of a difference between being really early and being wrong in this investing game.
There is one thing that is certain, and that is in a world that is going to be starved for energy, Exxon Mobil as an investment likely won’t do too badly.