A bit of a random walk and navel gazing this week as I process a number of seemingly unrelated events into what an almost formulated point…

 

First, while in Montreal I discovered that while I drive a gas-guzzling truck, my nieces don’t even want drivers’ licenses. They don’t drive, they don’t want to drive. They get everywhere by bus, subway, ride-sharing and the like, so who needs it?

 

“Shocking” I said.

 

“That’s what all their friends do” countered my sister.

 

“Hmm,” thought I, “Whatsoever does this mean?”

 

Never mind whether you agree with either side of that statement, everyone is entitled to their own decisions and my nieces are bright and articulate young women, but how does this “change” happen seemingly overnight?

 

Because let’s face it, that’s a pretty drastic change. I remember that time 35 years ago (ack!) when I couldn’t wait to get my hands on a license and a car, status, mobility, all those things. To hop in that car and hit the open road with all the freedom, discovery and truck stop hamburger steaks you could eat? That was living! But urban kids today – not so much, not with 24/7 transit service, ride-sharing and dense urban areas. It’s not that they don’t have a sense of discovery or adventure either. They just do it differently.

 

Is this a trend? A city thing? A Toronto thing? A conscience thing?

 

Are we as energy sector participants missing out on some secret post millennial grand bargain? Do we spend so much time taking for granted what we know and believe in our hearts about demand for our fossil fuels that a bus drove right by us while we were standing at the wrong stop? Has the world changed so much that we find ourselves on the wrong side of history, the butt of some great joke that only younger people get?

 

Or is it just a little more subtle than that? Is it maybe that what we do and produce is less important for the old reasons and maybe needs to be proved and reproved and become important for new reasons?

 

WHy do I say reproved? Mainly because I spend a lot of time in the numbers and what I see is that demand for fossil fuels is expected to grow by at least 30% by 2040.

 

Which is huge!

 

What’s different is that the growth is coming mainly from countries and regions such as China, India, South East Asia and Africa, largely because they seek the prosperity that we take for granted and the use of abundant and cheap fossil fuels is the surest and proven way to get there. First world growth is in a gradual decline. Maybe this is the new reason – sharing the wealth?

 

Which leads to the second event of the week. The passage in the Alberta legislature of the new carbon levy. This levy, tax, surcharge, cash grab, redistribution, whatever, has been introduced by the Alberta provincial government at a time of great financial distress in our province and takes effect in 2017. It is expected to raise $9 billion over 5 years for the provincial government and, in theory, “bend the curve” as the expression goes on carbon emissions. This is expected to in turn give the province the theoretical “social license” to develop and pipe the oil that apparently all the post millennials don’t actually want to the far-flung locations listed above that are more than happy to consume our bounty to power their grids, grow their crops and treat their water.

 

Rightly criticized by the opposition for being a major policy plank that wasn’t in the NDP platform, the levy itself, as a price on carbon, clearly has mainstream buy-in even from “deniers” who see it as the cost of doing business.

 

But it is a cost. And the NDP government has done a poor job of telling people what that cost will be and who it will actually be passed onto and how much.

 

So I will answer for them: “no one has a freaking clue”. But it will almost inevitably be higher than people expect and will manifest itself in places we least expect.

 

So millennials and post millennials want less of the cheap energy we produce and are willing to pay more not to use it. Ok fine, I think I get it. But where does it stop? Maybe in what the more pragmatic among us call the real world.

 

Which brings me to my last observation.

 

In a rather unique confluence of events, select Alberta gas stations have been running out of fuel over the past few weeks. The shortage is being blamed on wildfires and some unscheduled refinery maintenance.

 

OK, sure, but you know what? I don’t care! It’s a major pain in the patootie! Prices are going up. It’s a major inconvenience. I need to fill my gas-guzzling truck to get my kids around and go to work. Deliveries need to happen. Buses need to run. And what happens if the super-duper microcosm event were to spread? What happens as a capital starved energy sector with its many capex cutbacks, production declines and new carbon taxes start to show up as shortages and rapidly rising costs at service stations and the like around the world? Particularly with no game-changing technology waiting in the wings, at least anything as remotely affordable and widely distributed as our current energy market.

 

What happens is prices for everything start to rise. Food. Transport. Cheap toys from wherever. College. Rice. Sanitation. Government. National defence. Health care. Elder care. Fresh water. Inflation accelerates and interest rates start to rise. With higher interest rates, asset values start to shrink, including red-hot housing markets in places like Toronto and Vancouver among others.

 

And the prosperity bubble starts to shrink.

 

So what’s the point? Where is the thread in all this? To me, it’s all about cost and access and the trade-offs we as a society make to both preserve our current way of life and the future. And it seems to me that we are currently very fixated on an unpredictable future and not paying enough attention to the present day consequences of our actions. Continually raising the cost of something through taxes, legislated scarcity and subsidized inefficiency may generate revenues for government, but it makes life less affordable for the rest of us and isn’t really going to solve the problem.

 

Don’t get me wrong, I am all for clean energy, less pollution and a lessened environmental footprint, but I also believe that since so much of what we take for granted is the result of access to cheap and plentiful energy sources, including fossil fuels, that we need to be realistic about the potential detrimental effects to our way of life that we create by continually raising the cost of said energy without, shall we say, measurable return or, to put it bluntly, an achievable goal.

 

We need, as sector participants, to acknowledge that the way we go about our business is changing, sometimes rapidly, sometimes glacially, in many ways tectonically. The evidence of this is everywhere – in the rise of ride-sharing, urbanization and public transit to subsidies for alternative energy sources and carbon taxes designed to socially engineer consumption choices.

 

But we should never give up what we do and why we do it – to provide cheap energy to the broader world (well and make money doing it). Because this cheap energy has created the prosperity that we, as humans, count on and, ultimately, makes possible the conditions for society to reject it. But we also need to acknowledge that not everyone is at the same stage as us, and isn’t rich enough to tax themselves into the stone age, because that is what they are trying to rise out of.

 

Or put another way, rather than yelling into the wind and telling people that oil and pipelines are important to the Canadian economy, maybe we need to explain that access to any and all forms of cheap energy is the underpinning of modern prosperity and that denying it to the rest of the world is the ultimately cynical perpetuation of income inequality. Maybe the 1% isn’t Wall Street. Maybe it’s just us.

 

Soapbox herewith disembarked.

 

Prices as at June 10, 2016 (June 3, 2016)

• The price of oil ended the week up slightlyafter a rally past $51.50
  • Storage posted a decrease
  • Production was essentially flat
  • The rig count was up marginally and has bottomed out
  • Conitnued production declines in the US are helping keep prices up as are the production shut-ins around the world
  • Oil above $50 is not sustainable in the short term. Expect a pull-back for a period of time until the realities of the supply situation in Nigeria and Venezuela become clearer
• Natural gas rose during the week on bullish storage and weather

• WTI Crude: $48.92 ($48.78)
• Nymex Gas: $2.556 ($2.398)
• US/Canadian Dollar: $0.7835 ($ 0.7737)

 

Highlights

• As at June 3, 2016, US crude oil supplies were at 532.5 million barrels, a decrease of 3.2 million barrels from the previous week and 61.9 million barrels ahead of last year.
  • The number of days oil supply in storage was 32.6, ahead of last year’s 28.7.
  • Production was up marginally for the week at 8.745 million barrels per day. Production last year at the same time was 9.506 million barrels per day. The change in production this week came as a small increase in Alaska deliveries offset a drop in lower 48 production.
  • Imports remained elevated at 7.705 million barrels a day, compared to 6.623 million barrels per day tlast year
  • Refinery inputs were up marginally during the week at 16.417 million barrels a day, but strong for this time of year
  • The effect of the Fort McMurray shut downs are included in the import numbers so this decline has been offset by offloadings from other suppliers
• As at June 3, 2016, US natural gas in storage was 2,972 billion cubic feet (Bcf), which is 32% above the 5-year average and about 29% higher than last year’s level, following an implied net injection of 65 Bcf during the report week.
  • Overall U.S. natural gas consumption was up 1% during the week with modest increases across all major sectors
  • Temperatures during the report week were 7% above normal and 6% above last year at this time. Cooling degree-days (CDD) in the Lower 48 states hit its highest level since the beginning of 2016, totaling 52 CDD.
• Oil rig count at June 3 was at 328, up 3 from the week prior.Before people get too wound up about a potential shale rally, I would draw attention to the bullet point below
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 3 at 85.
  • Rig count at January 1, 2015 was 328
• The collapse in the US rig count is likely over with most of the damage already being done
• As of June 6, with break up winding down, the Canadian rig count was at 36 (8% utilization), 36 Alberta (8%), 7 BC (9%), 13 Saskatchewan (11%), 0 Manitoba (0%)). Utilization for the same period last year was about 10%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
• Offshore rig count was unchanged at 21
  • Offshore rig count at January 1, 2015 was 55

 

Drillbits

• The sports world lost three icons this past week
  • Gordie Howe, “Mr. Hockey”, passed away this week at age 88.
  • Muhammad Ali “The Greatest” passed away last Friday at age74
  • Kimbo Slice, professional MMA fighter, passed away at age 42
• The Alberta Government passed its Carbon Levy, which will add a $30/tonne of CO2 levy to producers
• The slow return and clean up in Fort McMurray which began on June 1 continues
  • Oilsands companies continue to restart their operations, a process that should take several weeks
• Drumpf Watch – The slate finally appears to be set. Drumpf will face Hillary Clinton and his own mouth in the November Federal elections. Speculation this week about whether Drumpf will have a running mate or not seems somewhat misplaced as there are plenty of minions and sycophants who would gladly bask in his aura for their own 15 minutes of national relevance. Right now my money is on either Newt Gingrich or the once-respectable turncoat, former New Jersey governor Chris Christie.