Dynamic Energy Markets Underlie Price Shifts

The charts below illustrate how prices for energy products that once moved together sometimes move apart. And sometimes the opposite occurs as in coal vs gas, when prices for different energy products converge.

WTI dropped below Brent due to a backup of North American oil in Cushing, Oklahoma. As new pipelines are built -- assuming a defeat of the US energy starvationist agenda in November -- WTI and Brent should converge toward a middle ground.

WTI vs Brent
Western Canada Select (WCS) is selling at only about $59 a barrel. This reflects the heavier nature of WCS, and the need for more expensive refining facilities to extract and refine its valuable components.

WTI vs WCS
The North American price for natural gas is much lower than the price in most of the rest of the world, reflecting significant advances in the technology of gas extraction in North America. The price differential between oil and gas per mmBTU has long hinted at an "oil price ceiling effect" of the new natural gas bonanza, sooner or later -- one way or another.

Shell is planning to build LNG pumps at 100 US interstate truck fueling stations.

Other ways in which natural gas is beginning to substitute for oil is via the petrochemicals industry (ethane cracking for plastics etc.), via gas to liquids (gtl) conversion of natural gas to diesel, increased use of compressed natural gas (CNG) in vehicle fleets, and more.

WTI vs US Nat Gas

As more uses for natural gas emerge, the price is expected to rise. But with the global emergence of tight gas exploration and development, the price of gas should continue to create a containing effect on the price of crude oil for some time.
Natural gas is increasingly being used in place of coal in electrical power plants in North America, as the price of gas has dropped to very competitive levels against coal. But globally, coal remains very popular, and North American coal companies have no problem finding overseas buyers for their product.

Bonus: Here is a speculative look at why the Saudis are flooding the markets with oil:

The economy. Saudi Arabia recognizes that lower prices in 1999 were a great helping solving the Asian debt crisis.

Russia: The Saudis are very upset with the situation in Syria. Lower oil prices will convince Putin to cooperate.

Iran: Lower oil prices will increase pressure on Iran.

Canada and the US: Lower prices will slow development of shale oil and tar sands.

Conservation: lower price might just slow the move of the US to efficiency. (might)

G20: Saudi Arabia likes to be considered part of the club. Lower prices would help renew their membership. _FT

Some of the above reasons for Saudi actions are probably true. Certainly the Saudis can punish Russia for misbehaving, given the Kremlin's excruciating dependency on energy exports to keep the domestic peace.

What is the likely near term future of energy prices? Here is one viewpoint:

Given that natural gas prices, outside the US will fall, coal prices are set to at best stagnate or decline, and renewable energy prices are in some cases on a steep downward slope - while global energy demand is set to grow at slower and slower rates - the potential for oil shock is low. Another oil panic is of low credibility, outside purely political driven oil crisis in the Middle East or possibly Africa. _MarketOracle

One hears such talk more and more from persons who not so long ago were shouting about the coming oil shocks or energy shocks. It is amazing how people's minds can be changed by brute facts hitting them in the face.

Peak oil doomers of the religious variety will not give in, however, no matter what. As well they should not, since people need to be true to themselves. As long as they are not so stupid as to make monetary bets on their religious beliefs, they should get along just fine.

And in the background are the lefty-Luddite green dieoff energy starvationists, working overtime to shut down coal, offshore oil, shale fracking, arctic energy, nuclear energy, and any other form of reliable, abundant, and affordable energy that may exist.

But we hope that in the US, such vermin can be largely cleaned out of government in November.

An Early Start to the Keystone XL Pipeline, in Hopes of an Obama Defeat

Canadian company Transcanada Corp. has announced that it will begin early construction of the southern leg of the Keystone XL pipeline -- the leg from Oklahoma to the Gulf of Mexico. This section of pipeline is the most critical leg in terms of global oil markets, since it will help to reduce the gap between the WTI oil price and the Brent price.

Image Credit: The Atlantic

Unlike the northern portion of the pipeline, the lower section won't require approval from the State Department, since it doesn't cross any international borders. So it doesn't appear there's much environmentalists can do to halt it.

Although Transcanada -- not to mention the Canadian government -- would surely love to see the entire, 1,600-mile Keystone XL pipeline built out eventually, constructing its southern link is by far the most pressing piece of business for oil companies. In the long term, Canada wants to make sure there's a reliable way to ship its crude oil as production in Alberta's tar sands ramps up. For now, it's oil companies would be happy if just a bit more of their product could make it to a refinery. During the past few years, the surge of both Canadian and U.S. oil production has overwhelmed the pipelines leading from Cushing to the Gulf, which has created a giant glut oil sitting in the heart of the country. As a result, prices have fallen well below oil drilled elsewhere in the world. That's been a boon for nearby refineries and motorists in state like Colorado. But it's an obviously frustrating situation for the drillers.

Creating a new pipeline from Canada to Oklahoma obviously won't alleviate that backup. But when the southern portion of Keystone XL is finished in 2013, it's expected to move about 700,000 barrels a day, which would go a long way towards a solution.... _Atlantic

Certainly the defeat of US president Obama in the ballot box in November would be a boost for energy producers across North America -- from oil to gas to nuclear to coal -- and a huge boost for the US private sector economy.

Another boost for world oil markets, would be the removal of Venezuelan president Hugo Chavez, and a return to a more rational control of Venezuelan oil. Oil production in Venezuela has fallen under the bulbous bombast, and the oil sector is by no means the limit to Chavez' incompetence. He is much like the US' Obama in that regard.

Since Chavez came to power in 1999, he has wasted oil revenue buying votes and supporting countries such as Syria and Cuba. His decision to take 300 private companies into public ownership - many without compensation - has scared investors away.

The oil industry has been hit hard by Chavez’s policies. Not only did he reverse plans to let the private sector have a greater role, he raised production taxes and fired a large number of oil workers for political reasons – starving the state oil company of talent.

The 'Chavez effect' on oil production is easy to demonstrate: in 1998, when the price of crude oil hit a low of under $11 a barrel, Venezuela produced 3,167,000 barrels of crude oil a day. Twelve years later, despite record prices, output was only 2,090,000 barrels a day – nearly a third lower. _Moneyweek

We can all hope for the removal of both Obama and Chavez in 2012, for the sake of the world economy and world energy supplies.

One of the most serious oversights of peak oil lifers, is their lack of awareness that several nations have the capacity to increase oil production by at least 1 million bpd over current production levels, if they are willing to divert funds from political cronies and social welfare programs for purposes of upgrading and maintaining oil production equipment. Venezuela is merely one of these countries. I will leave it as an exercise for you to name at least two others which fall in this category. It isn't hard to do.

Here is an Australian look at the death of peak oil