Last week featured a discussion about Canada’s place in the energy world and its role in supporting the oil and gas market in North America and elsewhere.

This week, the focus is on energy in general and oil and gas specifically, in particular given the massive amounts of anti-energy rhetoric leading up to the Paris Climate Summit including the near constant drum beat against “dirty” oil, Canadian political hand-wringing about being accepted by the global community, the breathless anticipation of the end of fossil fuels and the rise of the renewable, carbon-free utopia. Depending on who you read or listen to, either the oil and gas industry will be gone in 10 years (a recent survey in Canada suggested a majority think this is true!) or it will continue into perpetuity and it seems there is no middle ground.

But what does it all mean? Is the industry done? Is it really – “different this time”? Is the fossil fuel industry the equivalent of Beta????

Let me be the first to throw some cold water on this whole shlemozzle. Oil’s place in the world is secure for now and by for now, I am thinking my lifetime. I don’t get the basis of the argument about the imminent end of fossil fuels – where are the viable substitutes to replace its omnipresent place in society?

On the other hand, climate change and emissions matter and we need to reduce our reliance on those sources of energy that pollute the most. Renewables are great, wind power is awesome, as is solar, but they aren’t in line to replace the oil and gas industry, renewables inroads will continue to be into the power sector and are for the most part displacing coal-fired generation. I struggle to understand why this appears to be so confusing to so many people.

From a numbers perspective, the oil and gas industry is primarily transportation fuels and industrial uses (petrochemicals, etc.). According the EIA, 25% of all energy consumption in the world is used in the transportation of people and goods. These energy needs are met more than 98% by liquid fuels. It’s estimated that there are 1.2 billion vehicles in the world, not including off-road or construction vehicles. The number of planes in the world is expected to exceed 35,000 by the 2030’s. That’s a lot. Don’t even get me started on tires and boats!

Gasoline demand in the U.S. is the highest in 10 years. Consumption continues to grow in China notwithstanding the overall growth data (note – just because the headline number isn’t growing doesn’t mean all inputs are doing the exact same thing). Petrochemical plants continue to be announced and expanded. Consumption of all products fossil fuel related continues to grow. Last time I checked, you can’t make plastic from wind and you can’t fill a jerry can for a stranded motorist by leaving it out in the sun.

On the electricity front, demand for cheap electricity continues to grow and the delivery of that power is creating unprecedented quality of life around the globe. So demand for the fuels that power generation continues to grow. For mega-projects and secure supply to major urban centres, that by and large means coal, not oil, which of course means emissions. China and India continue to expand their use of coal to generate electricity, not because they don’t care about the environment, but because they need to generate cheap power to grow their economies and improve the living standards of 2.5 billion people. Sub-Saharan Africa has approximately 600 million people living without electricity, severely holding back GDP growth and the quality of life enjoyed elsewehre in the world – consumption there is expected to quadruple by 2040 with supply split 60%/40% between fossil fuels (gas and coal) and renewables/hydro.

Right now coal is one of easiest to source, cheapest, most efficient and most abundant fuel for power in the world. It also happens to have the most emissions, so if we need to phase out coal around the world, where is the economic alternative to be found to meet the scale needed?

You can kill an oil pipeline in Canada if it makes you feel good for “no net increase in emissions”, but if you can’t shut down 10% of the 150+ coal plants commissioned in China THIS YEAR or restrict the growing export of coal from the U.S. to those same plants in China or tell India, Africa and South America to stop using electricity, it is end of times for the climate if that’s your thing.

But if quality of life also matters, and our quality depends on cheap energy, where does that come from? If not oil, gas and coal then what?

Nuclear? These plants are increasingly being retired and replaced with what? Solar arrays in the desert? Local arrays on buildings? Wind farms that operate 60% to 70% of the time?

Modern society is built around a giant interconnected energy grid, not a bunch of localized and relatively unreliable micro generators. To replace the coal plant infrastructure that supplies up to 40% of the electricity in the world, the scale, capital and time required is mind-boggling. Which will of course have a major impact on the price of electricity and hence quality of life.

On the oil-side of the equation, transportation as well is built around a network of highways and refuelling stations. Unless there is a product in the wings that can take over this infrastructure, it’s here to stay as well.

People will argue that the cost of electric vehicles is coming down so replacement is coming, but I’m less interested in the cost of a Tesla (too high!) and more interested in the cost of fuelling them – which we appear to be committed to increasing as we replace cheap mass generation with more expensive, less efficient renewables, introduce carbon taxes, try to shut down oil and gas exploration and otherwise make our lives more expensive. Until mass replacement of the transport network is possible and the cost of electricity to fuel these vehicles comes down, to me, electric vehicles are just a vanity project for guilt-ridden, rich people.

This is why so many smart energy people like T. Boone Pickens will talk about a “transition” fuel like natural gas. i.e. If you want to replace oil with rainbow scented unicorn toots, you need something in the middle.

The energy content of natural gas is less than coal or oil, but it is widely available around the globe and currently cheap and can be used in both transport and electricity generation. It can be liquefied, shipped, regassified and burned. It is also connected to end markets by vast and complex installed infrastructure. But to get it to achieve a position of prominence as a replacement for oil and coal is going to take decades, but again way less time than replacing the grid and dirtier fossil fuels with renewables.

And as said previously, there are no other readily available mass substitutes unless the cold fusion revolution is happening anywhere aside from replays of Back to the Future II played on Grandpa’s Beta machine.

Speaking of Beta, that technology didn’t hit the dustbin because it was inferior, but because there was a competing product that was just as or more ubiquitously available and certainly not because people decided to replace it at great cost with something less reliable and more expensive.

Interesting, energy vs video technology… To me, coal is Beta, not oil. Oil and gas are, interchangeably, VHS and DVD. Last time I checked, there is no energy equivalent of Netflix, streaming, anything Apple waiting in the wings. It’s time to acknowledge the obvious and act like we know it.

Prices as at November 20, 2015 (November 13, 2015)

• The price of oil ended the week sharply up, after briefly dipping sub $40 and a choppy week of indicators.
  • Storage posted a smaller than expected increase
  • Production was up marginally
  • Markets are selling the storage story
  • The rig count decreased
• Natural gas lost ground during the week as production declines continue to be offset by a persistently warm fall

• WTI Crude: $41.60 ($40.85)
• Nymex Gas: $2.152 ($2.379)
• US/Canadian Dollar: $0.7494 ($ 0.7510)

Highlights

• As at November 13, 2015, US crude oil supplies were at 487.3 million barrels, an increase of 0.3 million barrels from the previous week and 106.2 million barrels ahead of last year. A decrease in imports and increase in refinery utilization led to inventories building only marginally.
• The number of days oil supply in storage was 30.8, ahead of last year’s 24.5.
• Production was down to 9.182 million barrels per day. Production last year at the same time was 9,002 million barrels per day. Based on the numbers, it is likely that by December year over year production growth in the U.S. will be negative. The marginal increase in production this week came from lower 48.
• As at November 13, 2015, US natural gas in storage was 4.000 billion cubic feet (Bcf), which is 5% above the 5-year average and about 11% higher than last year’s level, following an implied net injection of 15 Bcf during the report week.
• Overall U.S. natural gas consumption increased by 1% this week led by consumer demand
• Oil rig count at November 13 was down to 564 from 574 the week prior.
• Natural gas rigs drilling in the United States are flat at 193.
• As of November 16, the Canadian rig count was at 159 (21% utilization), 104 Alberta (20%), 32 BC (38%), 21 Saskatchewan (17%), 2 Manitoba (11%)). Utilization for the same week last year was 49%.
• US split of Oil vs Gas rigs is 74%/26%, in Canada the split is 40%/60%

Drillbits

• TransCanada and Enbridge both announced major layoffs. TransCanada is to be expected given the dialling down of the Keystone XL team.
• The Saudi Oil Minister announced that they were working with OPEC and non-OPEC members to stabilize the market. Traders took this as an opportunity to sell off, but the gist of the press release suggests that the Saudis may in fact be concerned about the amount of projects put on the shelf and the potential for a supply crucnh in the coming years
• Suncor announced a spending program of between $6.7 billion and $7.3 billion. In addition, along with the Canadian Oil Sands bid, President and CEO Steve Williams has indicated that Suncor will be an oilsands asset acquiror
• Drumpf Watch – Drumpf suggested that he is religiously tolerant, then said he would close mosques in the U.S.. His polling numbers went up