World Running Low on its “Energy Drink”

September 21, 2011

Did you know that China’s energy demand is set to grow so dramatically over the next 25 years that its consumption is expected to be 68 percent higher than that of the U.S.?

World Energy Consumption

That was only one of the findings of the U.S. Energy Information Administration (EIA). In its new International Energy Outlook 2011, the EIA reports that throughout the world, energy consumption is expected to rise by 53 percent from 2008 through 2035 driven by robust economic growth and expanding populations in the developing countries.

The EIA estimates growth to be relatively flat for OECD countries, which are generally the more advanced energy consumers. In contrast, non-OECD—emerging countries—are expected to expand by an average of 2.3 percent per year. Led by China and India, non-OECD Asia is expected to grow the most, rising 117 percent from 2008 to 2035. By 2035, China and India are expected to consume 31 percent of the world’s energy.

World Energy Consumption by Fuel

In terms of fuel type, liquids remain the world’s “monster energy drink” through 2035. The category includes petroleum, natural gas liquids, ethanol, biodiesel, coal-to-liquids and gas-to-liquids, and as you can see, the gap narrows between liquids and coal, but coal remains the second energy source to power the world.

Although demand for liquids is set to remain high, supply may be harder to come by. Take oil for example, as countries around the world are reporting numerous shortfalls. Our Global Resources Fund (PSPFX) investment team discusses this supply/demand imbalance often in our quest to find profitable, growing oil companies around the world. (Click here to see the video where Brian Hicks discusses the prospects for oil in Brazil.)

Months of uprising have incurred significant damage to Libya’s 50-year old oil industry. It’s been only weeks since Gaddafi was driven from power, and the National Transitional Council in Libya optimistically believes that the country’s production of oil will return to a pre-civil war level within a year. Many believe it could take longer.

Fields and export terminals along the southern Mediterranean shores show “visible signs of damage,” says the Financial Times. There is no power in the area, workers' homes are in shambles, and valuables have been stolen. Two of six terminals are badly wrecked, and old oil reservoirs have lost pressure. Tremendous work is needed just to get the country back up and running.

Deutsche Bank and Wood Mackenzie believe there will be a “drawn-out recovery,” one that lasts around 36 months, to return to what the country was producing before the crisis. This is assuming there is “a smooth transition to an interim government, swift removal of international sanctions and the return of International Oil Companies and foreign workers.”

Libya's Oil Production Return

This speaks to the importance of a new leader implementing the right policies. As FT pointed out, “In 1969, the year Gaddafi gained power, Libya produced nearly as much as Saudi Arabia.” Today, Saudi Arabia is the largest liquids producer in OPEC and has the world’s largest oil reserves with nearly 18 percent of the world total, according to the EIA.

“Libya has for years punched below its potential, hampered by lack of investment as its leader diverted funds for other causes and his personal use; sanctions preventing the return of U.S. companies; and an exodus of engineers to other countries in the region. But executives and officials believe the country, which boasts Africa’s largest reserves, could produce much more oil in the next two decades if the new ruling class pursues the right policies,” says FT.

With Libya’s oil, what matters here is quality, not quantity. Libya has provided the world with only a small percentage of oil, but it is a rare, high-quality crude accounting for 10-15 percent of global output for that caliber of oil, according to FT.

Libya is one example of an inability to quench the world’s thirst for oil. Kazakhstan, Brazil, Iraq and Mexico also have produced less than expected for very different reasons, says Barclays Capital. Mexico’s oil fields have had high decline rates. In Brazil, a new oil law gives a 30 percent stake in all new subsalt projects to state-oil company Petrobras, which could decrease the profitability of other companies. Foreign oil companies and state-run fields in Iraq have had to cut back their production estimates because of an “infrastructure bottleneck.” To fix this issue, the country has planned to build pipelines, tanks and terminals to handle the growth, says Barclays, but the production targets in Iraq have been lowered in the meantime.

Barclays says this “mismatch” between the tremendous demand and a problematic supply side is likely to keep prices high to balance the market, supporting the “long-term fundamentals of the oil market.”

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.

Holdings in the Global Resources Fund as a percentage of net assets as of 6/30/11: Petrobras, 0.00%, Eni 0.00%, Repsol 0.00%, Total 0.00%, OMV 0.00%, Occidental Petroleum 0.00%, ConocoPhillips 0.00%, Hess 2.74%, Marathon 1.41%, ExxonMobil 0.00%.

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