“The Geopolitics of Energy”: that was the title of a talk given at the Opportunity Crudes conference in Houston last week by Guy Caruso of the Center for Strategic and International Studies. It’s an endlessly fascinating and urgent topic, as very few sectors of the economy shape the world in which we live as much as energy — and particularly, oil — does.
Highlights of Caruso’s presentation — many of which are not novel or unique, but are worth restating:
Oil is currently inseparable with transportation: virtually 100% of mobility — whether by car, truck, rail, boat or plane — is fueled by petroleum-based products. Demand is flat or even shrinking in the U.S. and Europe, but this is more than offset by explosive demand growth in the developing world — especially China, but also India, and the Middle East. “The center of gravity of the oil industry is moving East.”
Most of the lowest-cost endowment of oil resources on the planet are concentrated in the Middle East, subject to great political instability. A scary thought: many leaders, especially in the lynchpin Saudi Arabia, are over 80 years old — what happens when they die?
Reliability of delivery is threatened by geogrpahic chokepoints. For instance, over 15 million barrels per day — nearly 20% of world oil supply — passes through the Strait of Hormuz. Although most of the oil passing through goes to Asia, the U.S. military remains the key protector of this vital trade route.
Meeting global demand growth in the face of declining conventional resources means two things: a shift towards unconventional resources (which are more expensive to produce, and face significant environmental/technical challenges) and an almost insatiable need for ongoing additional capital investment.
Although technological leadership may remain with the “supermajors”,15 of the 20 biggest oil companies in the world (i.e., the ones with the most reserves/resources) are now state-owned enterprises, such as Saudi Aramco and PDVSA. While some of these companies like Lukoil (LSE: LKOD), PetroChina (NYSE: PTR) and Petrobras (NYSE: PBR) do have minority stakes that float on stock exchanges, make no mistake: they are not being managed for the purposes of shareholder value maximization. These companies trade on stock exchanges solely to access global capital markets so as to finance immense expansion programs. Otherwise, their motivations are far different than profit-maximization as expressed so effectively by the supermajors: these organizations are arms of nationalistic pursuits. In other words, the oil game of the future will be driven less by money and more by geopolitical moves on the global chessboard.
There are more upward pressures on oil prices than downward pressures. Note that the oil industry is running at over 95% of capacity — there’s almost no spare or excess capacity to cope with any perturbations. Even so, most companies are using $60-80/bbl as the reference price in determining long-term capital investments: big bets require conservative assumptions.
Shale gas is a game-changer — not just in the U.S., but in many parts of the world. More gas will be used for power generation, which will displace coal. Indeed, without carbon capture and sequestration, coal will be under threat for both economic and environmental reasons in most places of the world. (Exception: China, which is growing so fast that it will build as much as possible in a true “all-of-the-above” energy strategy.)
Caruso closed by noting, humbly, that in his 40 years in forecasting the energy sector, there was a consistent tendency to underestimate the impact of technological advancement, which in turn renders long-term predictions subject to big errors. Not only will the finer points of his analysis be inaccurate, but some of the overarching conclusions — which seem so obvious today — will no doubt be wildly off a few decades from now. The key is figuring out which ones will be right and which ones will be wrong. Black swans are hard to see when they haven’t yet flown to the horizon.