Guest Blog by S. A. Shelley: Since 2016, OWOE staff have been watching energy markets change as new technologies and phenomenon entered society, or as old problems and business practices ossified. While 2020 was a wild year that laid bare the ineffectiveness of most major governments to handle crisis, it also exposed some of the fallacies upon which western societies are built: Namely the need for business executives to fly around the world for meetings, the need for hordes of people to commute to digital jobs, and of course the lack of economic robustness in most realms. For certain, the pandemic surge and economic drop of 2020 that cut travel, commuting and similar highly energy intense activities resulted in a major drop in oil demand (Reuters, US BLS), and a noticeable drop in CO2 emissions along with a corresponding improvement in overall air quality in many urban settings. But, and here's the real issue, as the pandemic ends, energy demand is increasing again.

Oil Demand is Declining

Globally, world oil demand is around 92 million bbls / day and pre-pandemic it was close to 100 million bbls / day. I reread many of the energy forecasts published by the IEA, EIA, OPEC, and by big corporations such as Exxon, BP and similar, since 2016 onward.  Most optimistic of those has been the IEA, which has consistently, year on year, forecast oil demand growth.

I'm not going to disparage the analysts at the IEA for getting it wrong, mainly on account of the pandemic last year appearing rather unexpectedly. But, I will point out that the trend in oil demand growth had already started to decline in 2018, something that we've noted in a prior blog. To reiterate, the decline in old demand growth is in response to changes in energy consumption, improvements in energy efficiency and the arrival of new technology that displace oil consumption. The intrusion and adaption of new technology into society increases in pace and thus oil demand will never recover to more than 100 million bbls / day post pandemic. On that I am certain.

In the backdrop of this steady and soon to be declining oil demand, many supermajors and national oil companies have announced new projects to bring oil to the markets. Offshore Norway, new developments have been announced in the environmentally sensitive North Atlantic and near Arctic regions (Arab News, World Oil), with Norway even musing about tax incentives to further accelerate offshore oil and gas development. Russia is also increasing investments in near arctic fields and of course, the middle East states such as Iran are actively courting Chinese buyers and investors in order to increase oil production. Venezuela has also recently announced a willingness to work with foreign companies in order to boost oil production. Rational thinking seems lacking from some big companies, and, just like in the past, the fast buck to be made can be quickly taken away: So watch out, trust Venezuela less than you trust Canada.

Then, of course, there is the United States and Canada where government policy is doing everything it can to stop oil production.  In the United States, 2020 oil production fell by about 8%, mainly in response to the pandemic reducing demand. However, it's always easier to cut production than it is to being new production on line. This truth, along with the executive halt to the keystone XL pipeline, could end up squeezing the United States when oil demand starts to stabilize and grow a bit. It will not take much for a rapidly shrinking supply and steady demand imbalance to develop, which will push prices at the pump over $4.00 / gallon causing a lot of consumer pain and political disdain.

Other quirky happenings relate to the Line 5 pipeline in Michigan. For Keystone XL, the Federal Liberals governing in Canada did nothing, but for Line 5 they have been swift to react and are pulling out all the stops. Apparently, if oil disruptions affect Ontario or Quebec, it is a critical concern, but anything that disrupts Alberta oil flows is ignored. Therefore, in order to balance things out, every time that a Federal Liberal politician in Canada voices concern for, or vows to fight for, Line 5, I donate money to an anti-line 5 campaign in Michigan. I will have more to write about American and Canadian energy follies in an upcoming blog.

Natural Gas Demand Is Increasing

That's it, and there is nothing that can be done about it nor should be done about it. Natural gas on the world markets is very cheap, and it's a great fuel to displace coal fired power plants as has been happening in the United States and probably will in Germany once the Nordstream 2 pipeline is completed and Germany is finally under the thumb of Moscow.  When it comes to the long game, politicians in the west are lousy at that, and are too quick to advance policy based upon minority extremist views without much rational basis.

As with oil, quite a few countries are announcing new projects to develop and produce more natural gas (Trend News Agency, Shafaq news) along with the associated infrastructure necessary to ship natural gas around the world. The Eastern Mediterranean basin is an area with huge natural gas finds offshore and their development can both stabilize and destabilize the region. In the Persian Gulf natural gas may soon be blended with hydrogen gas and exported, resulting in an ever cleaner fuel to supplant any remaining coal uses in power generation and industry.

What's happening in Australia is a muddle. Production and export of LNG is falling, in spite of the vast sums of money invested in recently completed LNG projects. I can't quite understand why Australian LNG projects are over budget and underperforming, and may take a crack at solving that riddle in a future blog.

With respect to oil demand comes the question about market share, as in who will control how much in order to make the most profit? Even though Russia is cooperating with Saudi Arabia to not flood the market with oil, Russia is consistently advocating for higher production. This could reflect the Russian need for revenue, and it's most certain that if Russia needs the money from oil sales, the Russians will act alone in order to maximize Russia's national interests.  Even if demand improves a bit this year, be ready for another oil price downturn as the excess supply available is still much greater than any demand increase that I foresee.  (Oops, I just forecast oil price, which when I started blogging, I promised to never do.)

In terms of supply, most of the oil will be supplied by authoritarian states, since Canada and now the United States are too feeble to make any effort to become the global market stabilizers and thus reap a good income for their citizens. The mantra of "Fossil fuels are bad" is being drummed through the halls of power by a small group of very loud progressives. Fossil fuels are bad, but there are degrees of "Bad": Coal, definitely bad and should be phased out everywhere as quickly as possible. Oil is still needed for a lot of industrial and transportation uses. Instead of rushing to force EVs on everyone, will someone in government finally clue in that it will require 1 million cars to be taken off the road just to match the CO2 output by one average sized coal fired power plant. Wouldn't it be a better plan to kill off all coal plants as quickly as possible, instead of haranguing millions and millions of middle and lower working class citizens who can barely afford a quality used ICE let alone get near a new EV?

But in the background to all this oil and gas discussion is the bigger picture of global energy demand, and that will be increasing for some time.  The question is whether renewable technology can fulfill all that global energy demand growth and whether we'll have to settle for a bigger blend of nuclear, geothermal, gas and renewables.

Have fun everyone. Stay safe, and vive l'Alberta libre!