No Hot Air

Structures, not cycles

On the energy supply side we have the revolution in gas production combining with the game changer of oil/gas decoupling and globalisation to create all good news in energy supply. 

Energy bulls at wholesale and energy risk merchants at retail clutch at straws and search for energy tea leaves by saying that recovering demand will cause prices to rise. Quite apart from how difficult it would be to counteract a doubling, tripling or nine fold increase in supply with a demand rise, the big problem to that theory is: demand is not rising.  Energy has been cyclical up to now. From now on it will be structural, much more interesting, much less volatile and  far cheaper in the cost per unit.

The bull/risk story depends a lot on oil and gas prices acting as they have in the past:  A boom and bust cycle in prices has similar impacts in the demand cycle. But on the demand side, we have certainly passed the peak in developed economies and see a precipitous decline in the rate of growth of developing economies. Why?

Those seeking simple answers, please look away. But the simple overall answer is that people are no longer energy obese. And just like losing a few kilos of weight, losing the fat surrounding energy isn't the same as cutting off ten pounds of ugly fat (your head as any ten year old can tell you), but a whole suite of little things that end up adding up to if not a lot, at least to a trend significant enough to start having an impact on markets.

This time will be different for a variety of reasons. Energy markets can blame themselves a lot by pushing up prices so far last year. Energy producers thought that as in the past demand is inelastic and that all levels of customer simply pony up however outrageous prices became. But this time, price sticker shock combined with efficiency gains,conservation measures and the rising number of alternatives to carbon fuels to cause a drop in demand across all industries and sectors.  Sure we see collapsing industrial demand (Iron and Steel 30% down year on year), but even assuming a big if of a rising economy,  structural changes are replacing cyclical ones. One of our favourite stats is how UK domestic gas use fell by 4% in January 2009 despite weather 40% colder than Jan 2008. 

Price had a lot to do  with that, but it's not  all of it.  Perhaps people lagged their attics, or put on a cardie.  But a more prosaic explanation is that one can reasonably expect 5% of gas central heating boilers to be replaced naturally every year. And any GCH boiler today is going to be at anywhere from 25 to 60% more efficient than the one it replaced. 

Similar savings come from anything else: A consumer may be of the  opinion that  carbon change is one big con, but however much they try, it is impossible for them to buy a light bulb that uses more energy than the one it replaced. They would have to replace one 60 watt bulb with four CFL bulbs and would  still be using less energy.

We've been meaning to  thank, as we have before, Peter Tertzakian of the Calgary Herald.  Energy books are not generally delivered in a clear, witty and understandable way as in The End Of Energy Obesity, a book we commend, or is that channel, to everyone. The best energy book of the year for sure.

European Shale Gas doesn't start out in Europe...

We've already seen Statoil Hydro with Chesapeake, the largest US shale gas player last November:

StatoilHydro, the second largest natural gas supplier to Europe and Chesapeake Energy Corporation, the largest US natural gas producer, today announced the signature of a strategic agreement to jointly explore unconventional gas opportunities worldwide.

Helge Lund, President and CEO of StatoilHydro, stated that:
“I am pleased that we today have made a strategically important move by joining forces with Chesapeake which is the leading US gas player. We are establishing a strong platform for further developing our gas

But the biggest player from Europe is also  there:

For a company with the luxury of taking a long-term view of energy prices, now is a logical time to buy. It's no surprise that rumours of a full take-over by BP of Chesapeake have resurfaced. BP has already established a foothold in the US shale-gas plays, having bought acreage in the Fayetteville and Woodford shales from Chesapeake last year for a total of $3.65bn. But Chesapeake has more to offer: 8.6 trillion cf equivalent (cfe) of total proved reserves and 5

Which means that the smaller players on both side of the Atlantic have to make strategic alliances, hence today's news from ENI:

Oltre a Fiat anche Eni sbarca in America. Il cane a sei zampe ha firmato in Usa un'alleanza strategica con Quicksilver Resources produttore indipendente di gas naturale, per l’acquisto di una quota del 27,5%, al prezzo di 280 milioni di dollari.

Even international oil companies don't make 280 million dollar investments on spec.  And Fort Worth is a long way from Milan.  Just because things aren't happening here, doesn't mean they aren't happening here.

Why are Oil Prices rising?

From which we can also ask why is UK NBP and Henry Hub (US) gas rising?  Business Week  naming the usual suspects:

Is this deja vu all over again? Didn’t we just go through a several-year run-up in prices based largely not on fundamentals, but on traders bidding them up, ultimately to $147 a barrel? Only then to see them plunge to $32 a barrel?

If one puts stock in the plunge, then there appears to be air in the run-up today to a six-month-high of $60 a barrel. How much is anyone’s guess. The other day, one exceedingly smart oil analyst privately put it in the range of $5 to $10 a barrel.

Who needs fundamentals when one has emotion? One emotive story, which we demolished on Tuesday, says China's energy demand is insatiable.

Back to emotion and the BW story mentions a recent favourite book of ours: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism   Our opinion is shared by people in high places:

White House Budget Director Peter Orszag is a numbers guy, a propeller head as President Obama would say. But as David Von Drehle and I write in this week's print version of Time, Orszag has been spending his time recently reading not about spreadsheets, but about psychology. In particular, he has been reading a new book by the economists George Akerlof and Robert Shiller called Animal Spirits: How Human Psychology Drives The Economy, and Why It Matters For Global Capitalism. . . . We are, it turns out, slaves to the Animal Spirits. They have brought us to our knees. And now they are the only things that can save us.
(Michael Scherer Time.com's Swampland )

But some people are looking for maps and a story, even a wrong one, is better than none.

We share the view that reality will eventually intrude: 

Over at the Oil Drum, Rune Likvern says up to 3 million barrels a day of oil is being bought purely for storage, including on the sea. But he predicts that such purchases – which help to prop up prices – will decline because storage is becoming harder and harder to find; when they do, Likvern says, prices will fall substantially.

To which we must point out that over 700 ships (of all types, not just tankers) are sitting empty off Singapore, 150 off Gibraltar and 300 in Rotterdam, because there isn't a whole bunch of  Chinese made stuff to put into them. Doesn't smell like a recovery to us.

To us this sounds like something to look for. If China is recovering, whether you believe the China energy link or not, then the boats will start to move over the course of the summer.  If they are there in September, we're sunk.

More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.

“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company

Finally, substitute gas for oil and consultants for traders in the final sentence from Business Week. Please don't substitute your name for fool.

It’s a fool’s game to predict oil prices. That doesn’t stop a lot of people, of course, especially the traders.

 

Without Hot Air

How could we resist a title like  Sustainable Energy - without the Hot Air ?

We can be jealous about blurbs like these:

The Freakonomics of conservation, climate and energy.

A Tour de Force

For anyone with influence on energy policy, whether in government, business or a campaign group, this book should be compulsory reading.

But, apart from the obvious benefits of people mis-Googling and ending up here,  it looks like we do share more than a nifty title.  We chose No Hot Air as the name to represent our commitment to new thinking and counter-intuition.  We toyed with the name of No Inconsequential Bull****, as being much more representative but figured we were already alienating large numbers of the potential audience and why push our luck further.

New thinking based on facts and the real world (or the surreal world of UK Business Energy buying) is what we do.  Counter intuitive thinking  is how we get there. We face the world as it is and how it could be and not trying to construct (and sell) a reality  based on mis-conceptions, half-truths, disingenuousness or plain old fraud.

Business users seem especially prone to looking for excuses not to do something about energy, and the energy risk industry of consultants, regulators and shills enable them. We've talked a lot recently about two opposite trends, where energy is seen as a major problem while actually plunging in price. We have pointed out the contradiction of businesses needing to get their act together on energy when the worst of energy price rises are, for the next few years, behind us. The reason for declining energy prices depends on declining energy demand, and it's a conundrum and a key reason why we concentrate on energy use, not price. We also think that carbon taxes can reward either good behaviour or the simple good housekeeping that many UK business energy users don't practice without the data, or time, or people they can trust, to deal with.

One thing No Hot Air, and Without Hot Air share is that information on energy should be free. You can download the entire book for nada, zilch, nothing.  We've said from day one that  our big problem is how to make money by telling people to do nothing, in an industry that thrives on creating an illusion of scarcity and crisis. Tell people everything will work out and get ignored.  Create a problem, describe a crisis, sell the solution, get invited on the Today show.

As we like to say, we don't have a crystal ball, but no one has to cross our palm with silver either. No Hot Air, the one and only. But at first look, Without Hot Air, with a healthy stress on "debunking myths" are people after our own hearts.

Book Time

Great book, and great quote :

I Wouldn’t Start From Here: 21st Century And Where It All Went Wrong by Andrew Mueller

Will this book help you with buying business energy? Of course not. Although it will help you put things into perspective.

"The world isn't a battle between good and evil, it's more like the smart against the stupid. I'm betting on the smart, but the stupid have the numbers."

Two Books for Energy Buyers. And smart people as well.

Predictably Irrational: The Hidden Forces That Shape Our Decisions
By Dan Ariely
Nudge: Improving Decisions About Health, Wealth, and Happiness
By Richard H. Thaler and Cass R. Sunstein
Book Review of  two books Ofgem  and your energy consultant would rather you not read. 

Two reasons to take this seriously:  Both  are based on the work of Daniel Kahneman founder of behavioural economics.  Your energy consultant may try to tell you they are smarter than some Yank psychologist,  but then again, they didn’t win the 2002 Nobel Prize for Economics.

Secondly, both authors are advisers to Barack Obama.   Whatever comes of his campaign,  you can bet your bottom pound  that David Cameron and Gordon Brown are now in a mad rush to use the same  ideas for a UK audience.
Obama rejects heavy-handed regulation and insists above all on disclosure, so that consumers will know exactly what they are getting.
The key word is disclosure and the other key word is feedback.  UK energy consumers get neither, but are expected to keep on paying.  They won’t keep happily paying, or voting, without  some feedback or correctly framed default options.