Oil & Gas Industry: Projecting What's Ahead in 2030

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Includes: DIG, DUG, ENY, IEO, IEZ, IXC, IYE, OIH, PXI
by: Tate Dwinnell

Guest Author: Robert Williams

Although these industry perspectives are designed to identify companies actively involved in all oil/gas industry aspects, this issue focuses on year 2030 projections and Energy Industry Exchange Traded Funds [ETF]. The first Industry Perspective highlighted oil/gas engineering companies and the second Industry Perspective focused on offshore crude oil exploration and production.

The future energy use projections in this Perspective are based on industry reports issued by US Energy Information Administration International Energy Agency (also here) and American Petroleum Institute . The following perspectives are provided rather than churning out data tables and pie charts. Pie charts you can’t eat, but candlestick charts you can take to the bank. The question is will there be enough oil and gas in 2030, or will there be an excess due to Alternative Energy developments? Will we be driving hydrogen-fueled automobiles by 2030?

Industry Perspectives

1. Energy usage in the United States is forecast by the Energy Information Administration [EIA] to increase 34% in the next twenty-five years, or 1.1% annually.

2. Fossil fuels (oil, natural gas, and coal) account for 88 percent of the growth [out to 2030],” states the EIA “with coal use increasing by 53 percent, petroleum by 34 percent, and natural gas by 20 percent over that period.”The market share of oil, gas, and coal is expected to be approximately 86 percent in 2030, the same share as today. Globally, the story is much the same, with fossil fuels accounting for 83% of the increase in projected demand out to 2030.

3. Energy consumption continues to increase because of population gains and higher per capita usage from greater wealth and access to new appliances and devices.

4. Globally, the Organization for Economic Co-operation and Development’s [OECD] International Energy Agency projects a 52% rise in energy consumption by 2030, a 1.6% annual increase led by developing countries many of which are expected to escape energy poverty and improve their living standards.

5. In 2030 the average real price of crude oil is projected to be $72 per barrel in 2006 dollars or about $113 per barrel in nominal dollars.

6. $100 per barrel crude oil could possibly be a psychological barrier to spur alternate energy development and really affect transportation consumption.

7. Worldwide new refinery and refinery expansion programs will be on-stream in 2009 and 2010 which will maintain crude oil demand, with a definite shift to heavy crude oil/tar sands refining.

8. The increase in China’s energy demand between 2002 and 2005 was equivalent to Japan’s current annual energy use.

9. India is set to become the world's third largest oil importer after the US and China before 2025, according to the International Energy Agency. India’s energy needs would overtake Japan as the third largest net importer of oil before 2025.

10. Despite high crude oil prices, economic growth has been very strong especially for China and India but also globally. Is this the reason for high crude prices or pure speculation, based on negative inventory reports and Nigerian violence news reports (as reported Jan 2, 2008)?

11. Is ongoing global warming going to continue affecting energy consumption for winter heating and summer cooling? Natural gas is extensively used for electric power generation.

12. Energy is consumed in four economic sectors of residential, commercial, industrial and transportation. All these economic sectors will continue to expand their oil and gas consumption.

13. Crude oil is still required for road asphalt, roofing, petrochemical plants, packaging waxes, pharmaceuticals, adhesives and even cosmetics. Transportation has been and still is almost totally dependent on petroleum products. Natural gas is still required for chemical and rubber manufacture.

14. Crude oil production has been ongoing since August 1859 and overproduction has driven prices down occasionally, but only temporarily.

15. China is the world’s manufacturing hub (if you had not noticed) due to current cheap labor costs, its market size and rapid technological modernization. Next Oil & Gas Industry Perspective will highlight China oil companies and their global development.

16. The transition to alternative and renewable energy will take a very long time which will be supported only by continued high crude oil prices.

17. US Strategic Petroleum Reserves [SPR] are currently just less than 700 million barrels of crude oil. Congress has designated that the SPR shall hold 1 Billion barrels whereas President Bush has targeted 1.5 Billion barrels in 20 years. The federally-owned oil stocks are stored in huge underground salt caverns along the coastline of the Gulf of Mexico. Current days of import protection in SPR are 56 days. The IEA requirement is for 90 days of import protection. Average price paid for oil in the Reserve is $27.73 per barrel.

18. SPR allows the United States to meet part of its International Energy Agency obligation to maintain emergency oil stocks, and it provides a national defense fuel reserve.

19. Author has five years engineering through to operations experience with Saudi Strategic Storage Program where petroleum products were stored in underground tanks protected for nuclear, chemical and biological warfare. Saudis do not need to store crude oil underground.

20. Home heating oil reserves (in above ground storage tanks) also exists in North East US of about 2 million barrels.

21. New Federal buildings have new target codes to achieve at least 30% energy efficiency over prevailing building codes.

Oil & Gas Industry ETF

1) SELECT SECTOR SPDR -ENERGY (NYSEARCA:XLE) - Includes companies from the following industries: oil, gas, energy equipment & services.

2) OIL SVC HOLDRS (NYSEARCA:OIH) -. There are currently 18 oil service industry companies included in the investment most of which were identified in previous Industry Perspectives.

3) CLAYMORE ETF TRUST ENERGY (NYSEARCA:ENY) - Correspond generally to the performance of an equity index called the Sustainable Canadian Energy Income index. The index is comprised of 30 stocks listed on the Toronto Stock Exchange (the "TSX"), AMEX, NASDAQ or NYSE.

4) ISHARES TR DJ OIL EQUIP (NYSEARCA:IEZ) - Includes companies that are suppliers of equipment or services to oil fields and offshore platforms, such as drilling, exploration, engineering, logistics, seismic information services and platform construction.

5) ISHARES TR DJ OIL&GAS EXP (NYSEARCA:IEO) - Includes companies that are engaged in the exploration for and extraction, production, refining, and supply of oil and gas products.

6) ISHARES TR DJ US ENERGY (NYSEARCA:IYE) - Includes companies in the following sectors: oil and gas producers and oil equipment, services and distribution.

7) ISHARES TR S&P GBL ENER (NYSEARCA:IXC) - Includes oil equipment and services, oil exploration and production, and oil refineries.

8) POWERSHARES ETF TRUST ENERGY SEC POR (NASDAQ:PXI) - The index consists of approximately 60 U.S. energy companies. These companies are principally engaged in the business of producing, distributing or servicing energy-related products, including oil services, pipeline, and solar, wind and other non-oil based energy.

9) PROSHARES TR ULTRA O&G PRO (NYSEARCA:DIG) - The investment seeks daily investment results which correspond to twice the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests in equity securities and/or financial instruments (including derivatives).

10) PROSHARES TR ULTRASHORT O&G (NYSEARCA:DUG) - The investment seeks daily investment results which correspond to the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. It may employ leveraged investment techniques in seeking its investment objective. Please note that DIG and DUG are inverse to each other. Is there a profitable trading strategy that applies to switching between these two funds?

Summary

Hydrocarbons (crude oil and natural gas and their derivatives) are expected to remain the mainstay of the U.S. energy sector for the foreseeable future. Hydrocarbons are projected to remain the dominant energy source on a worldwide basis, as well. However, it is important to note that technology development has made current hydrocarbon use much more environmentally friendly compared to several decades ago (e.g., reduced sulfur in gasoline and diesel, reduced toxics in gasoline), and additional technology development promises to continue this trend.

Brief Bio: Author Robert William’s 40 years experience includes oil/gas engineering in crude oil/petroleum products/natural gas refining, processing and pipelines on all continents, except South America and Antarctica, from Alaska and Australia pipelines to S.E. Asia offshore, from UK North Sea to Los Angeles fuel truck racks and from Romanian pipelines to West Africa FPSO.