China is now the world’s #1 consumer of energy, and its hunger for oil, gas, and coal (to fuel power plants like this one) will continue to grow, according to the IEA. (image: cejournal.net)

On Monday, the International Energy Agency (IEA) reported an event that energy experts around the world have been predicting for years: China has officially overtaken the US as the world’s biggest consumer of energy.

The Financial Times reported (via cnbc.com) on Tuesday that the IEA’s just-released report on last year’s energy consumption data showed that

China last year consumed 2,252m tons of oil equivalent of energy from sources including coal, oil, nuclear power, natural gas and hydropower, about 4 per cent more than the US.

The announcement amounts to an important milestone in the shifting picture of how the world’s energy is used and who is consuming it. It also highlights two trends that have marked the last decade: rapid growth in China’s economy and thirst for energy and increasing energy efficiency in the US. More recently, the global recession curbed energy use in the US by slowing down the national economy while having less of an effect on China’s economic health and growth.

The effects of China’s ascendance to the top of the list of the world’s energy-consuming all-stars will be no less than transformative, the IEA said. As energy demand in China grows, so will its imports of oil, coal, and natural gas, which could lead to rising prices or even price spikes. Many believe that breakneck growth in Chinese oil demand was a major factor behind the crude oil price spike of 2008.

As the world’s biggest energy consumer, China will also have a major influence over how energy is used, “from the types of cars manufactured to the kinds of power plants built,” reported the Times. In doing so, China will help determine modes and methods of energy consumption in the rest of the world.

In a development that offers a glimpse at how energy-gobbling China might affect oil markets in the coming years, the Asian nation was also the top importer of crude from Saudi Arabia in 2009—a title that the US had held for decades.

While the IEA report confirms that the US saved money and reduced carbon emissions by consuming energy more efficiently over the last decade (efficiency increased by an average of 2.5 percent per year during that time), it also showed that China’s insatiable appetite for energy will more than offset any consumption reductions in the US or Europe.

The IEA’s finding does not come as much of a surprise to energy observers, but it did happen a bit more quickly than many expected. It’s now more clear than ever that if you want to know what the future of energy looks like, you should keep an eye on China.

Investment problems arising from dwindling oil supplies is an underreported story of the International Energy Forum meeting. (image: energyinsights.net)

As someone who spent much of last week reading up on the International Energy Forum’s latest biennial meeting, I have to comment on a strangeness that I’ve been seeing in the convention’s coverage and content.

1. First of all, the Cancun meeting was a very important gathering, drawing over 60 of the world’s energy ministers, the CEOs of oil majors Royal Dutch Shell, Exxon Mobil, ConocoPhillips, and Total, and the heads of both OPEC and the International Energy Agency (IEA). So it was surprising how few press outlets reported on the event, and that the convention’s result, a declaration establishing intent to form a new collaborative framework within the association, was largely passed over.

As it turns out, all of the reporters invited to the conference were barred from entering the main conference room, and the pressroom TV was switched to CNN during the proceedings.

2. Second, the aim of the meeting was to address oil price volatility: the last two years’ dramatic sways in oil prices have wrecked havoc on the world economy as well as the ability of oil companies to invest in projects and energy ministers to plan department budgets. Yet according to a CNBC report from March 26, a report by OPEC slated to be presented during the convention predicted oil prices would remain within the range of $70-80 a barrel. That forecast is significant coming from a market actor with as much influence as OPEC, but rather incongruent with a meeting that casts price stability something to achieve, not celebrate in advance.

Upon examining the OPEC report’s language from an excerpt in Emirates Business 24/7, the contradiction appears to vanish, because the forecast on refers to “nominal prices”—the value of oil as determined solely by supply and demand in the physical market. If attendees’ fear of price volatility comes only from speculation, then it would be possible for the meeting’s stated goal and expectations of steady prices to coexist.

As it happens, excess speculation was indeed the reigning target of blame for IEF convention participants, who unanimously identify it as the important factor behind the July 2008 price spike and the following two years’ wild ride.

3. Coverage of the IEF meeting presents excessive speculation as the association’s sole concern in managing price volatility. That’s largely because that’s what the quoted participants stress in unison. But the summary of a report commissioned by the IEF in July 2009 paints a different picture—one of supply anxieties.

Conducted by global energy advisers PFC Energy, the report states production declines in oilfields outside of OPEC and the former Soviet Union have steadily intensified in recent years, “despite high oil prices.” It adds that while investment in oil exploration and development has tripled since 1997, reserve additions have dropped by nearly 60% “in the same period.” Given this report’s findings, it’s surprising that not a single IEF participant quoted in the media mentioned dwindling global supplies as an issue jeopardizing stable oil prices.

Also, its recommendations focus on world governments and suggest that the oil industry is in need of a hand out.

Governments should support the basic R&D necessary to promote commercialization of new processes to increase supplies—or more efficiently use demand—including developments of alternative energy sources. (”Unpacking Uncertainty: Investment Issues in the Petroleum Sector,” July 2009)

Alternative energy is not controversial, but stepped-up subsidies to oil exploration and production companies certainly would be. In the context of the IEF convention, that recommendation is strange because it suggests that oil producers’ investment issues stem from new difficulties in extracting oil, not price volatility. The full report is here.

4. The last oddity is that, what little coverage that did come out during the two-day convention reported that state intervention in pricing was a stability-enhancing measure under serious consideration at the meeting. On March 31, The Financial Times posted a video interview with IEF chief Noé van Hulst in which he agreed that “talking about prices” was no longer taboo, and UK energy minister Lord Hunt showing carefully worded openness to price manipulation. The article was re-posted on April 1 with the headline, “Big energy consumers align with Opec on intervention.”

Where did this consensus go? It’s nowhere to be found in the Cancun declaration, which only paves the way for enhanced dialogue and cooperation, and shows no policy alignments or recommendations.

So, here goes my own guess at what’s behind this mess: Something new is happening. It’s bad or very complicated and unformed: thus the conspicuous silence. Supply concerns are clearly present but go unspoken in public. Government price manipulation was at least briefly favored by forum members, and was likely motivated by the needs of industry (the higher costs of oil production) at least as much as it was motivated by volatility due to speculation. Maybe we’ll hear about market intervention again, maybe we won’t. If we don’t, it may be because prices are going to stay high despite a demand drop or flatness, and will in that way remain stable. Maybe all this talk of “price stability” is really a euphemism for high prices, because one ensures the other when you’re not on the side of the oil industry or government. High prices would provide an incentive for supply rationing if demand spiked, and serve as a form of stability if demand drops. If prices are high enough they’d buffer against the stormy effects of speculation, and they’d also allow producers to invest in otherwise impossible projects to bring more oil on the line. High oil prices make manufactured products and transportation more expensive, but at least they would be stable. Governments would be able to plan their budgets, and companies could invest in new oil projects. If high prices are the only way to steady prices (depending how high), maybe governments find the trade off worth it.

Speculation on commodities markets has been driving up heating oil and gasoline prices for months. (image: freeople.com)

As crude and heating oil prices rose during the course of 2009 in the face of low demand and massive supplies, it became increasingly clear that speculation was once again driving up oil prices.

This week, crude oil prices hit a 17-month high, sparking a new thrust of media activity on oil speculation’s outsized influence on prices that leads directly to Americans paying more for gasoline and heating oil. Following a story on speculation driving up prices from a producer at MSNBC published on Wednesday, writers for the Wall Steet Journal’s MarketWatch column, the Miami Herald, and CNBC all got in on the story this week:

From Jim Jelter at MarketWatch:

…mixed into the fundamental news are forces that have less to do with the laws of supply and demand than with financial forces far beyond the oil industry. Oil futures long ago ceased to function merely as vehicles for managing risk in the energy business.

From Kevin G. Hall of the Miami Herald:

“It’s the story we’ve been talking about . . . . It’s really about oil being an attractive investment for investors right now,” said Troy Green, a AAA spokesman. “You’ve seen quite a bit of money flooding into the oil markets because of that.” What’s different about today’s price run-up from two or three years ago is that oil is now in ample supply.

In response to President Obama’s announcement of expanded oil drilling off the US coasts, Michael W. Masters wrote for CNBC:

It’s important for observers to realize that, while more drilling may help domestic supplies over the very long term, oil price formation is dominated by speculative money flows today. So in this case, despite a major announcement by the President, which could easily be viewed as leading to larger supply, oil prices rise.

For the last year (and perhaps longer) there have essentially been two prices of crude oil and other petroleum products: the real world or “nominal” price based on supply and demand (the only forces that should influence prices) and the speculative “paper” price set by surging investment activity by major players on the financial markets. Despite living in the real world, consumers of heating oil and gasoline have been forced to pay prices determined by the speculative world that only exists within the world’s commodities markets.

Kudos to the national mainstream media for finally reporting on this phenomenon. Perhaps that reporting will help speed along regulations under consideration by the CFTC aimed at curbing excessive speculation.

Just remember when you read a story on speculation driving today’s higher oil prices—HeatingOil.com reported it first.

Cancun, Mexico, where the world's energy ministers agreed to create an open database of every nation's oil supply and demand figures. (image: bugbog.com)

Despite a dearth of media coverage, a historic event occurred on Wednesday: the International Energy Forum (IEF)’s biennial meeting produced a declaration approved by 66 nations in attendance that announced a new collaborative relationship that would lead to greater information sharing and transparency in the oil market.

The Cancun Ministerial Declaration (named after the convention’s location in Cancun, Mexico) stresses neither market regulation nor market intervention as recommended policies to combat oil price volatility, despite prior coverage that suggested these methods were under consideration. Instead, it favors a stepped-up version of what has been a project of the association since 2001: to create its own database of information on every nation’s oil demand, production, consumption, and stocks that would be constantly updated. Called the Joint Oil Data Initiative (JODI), the database was meant to parallel the International Energy Agency (IEA)’s authoritative Oil Market Report in its goals while rivaling it in quality and openness.

The successful production of this data resource would be no small achievement, and would likely lead to greater transparency in and wider understanding of oil markets. Speculation thrives on lack of information. The present lack of solid and widely-accepted information on factors like oil production figures is what allows analysts from firms like Goldman Sachs to sway the market with nebulous citations like “limits in the production and storage of commodities” in a market forecast. Because financial journalists believe that analysts have access to information they themselves do not, it’s impossible for them to analyze or verify these statements. If a publicly available and updated database of detailed supply and demand information were available, journalists, analysts, energy ministers, and traders would be able to thoroughly evaluate the validity of all statements and forecasts. Importantly, traders would also have the ability to choose what source of information to take seriously, lessening the influence that the prices of oil contracts several months into the future have on near-term investments. This could dampen the kind of excess speculation that leads to price volatility, because the artificial demand created by speculators buying up futures contracts would be more clearly visible. Instead, investors could choose to base their decisions more heavily on physical data.

As the only international energy organization that includes new consuming majors such as China, India, and Brazil as members (and therefore, as collaborators), the IEF is amidst a fast rise in its global relevance. In an interview with Financial Times Chief Energy Correspondent Carola Hoyos on the last day of the conference, IEA chief Nobuo Tanaka gave his blessings to the forum, which now will begin to rival his own organization’s as the authority on global energy data.

If the IEF succeeds in producing a high quality and openly accessible database of global oil data, oil prices would likely becomes less volatile. However, the effectiveness of this measure alone is skeptical. ”Data collection” appears to be the limit of IEF’s power. Despite wide acceptance within its ranks that excessive speculation in the New York and London commodities markets is the root of volatile oil prices over the past two years, the respective oil ministers and leaders don’t have any power to directly limit this activity. Even if sweeping numbers of traders began to adjust their investments to JODI-informed criteria, powerful speculators like Goldman Sachs, and JP Morgan would still wield significant influence on the market. Addressing this imbalance is the aim of commodities market regulation, which is the province solely of the Commodities Future Trade Commission in the US, and the Financial Services Authority in the UK, and it’s unclear whether the slow progress of the CFTC and the hands-off approach of the UK would be swayed even by a unified front of the majority of the world’s countries.

In addition to a re-energized commitment to JODI, the Cancun Declaration (pdf here) establishes the development of a more formal organization within the IEF. In its plan to expand the dialogue between producing and consuming nations, the IEF is careful to preserve the “informality” that has been critical for its past collaborative success. However, the document’s talk of a coming “IEF Charter” lends credence to the sense that privileges will be extended to those who elect to participate in the new framework. Because this is a very early stage of a new kind of agency, we will have to wait months for more details. That next soonest event will likely be the joint symposium the IEF plans to hold with OPEC and the IEA in January 2011.

Yesterday, heating oil prices rose due to expectations for reports of an employment recovery. (image: sandiegobusinesslawyerblog.com, bortonia via istockphoto.com, and zimbio.com)

Yesterday’s substantial gains in crude and heating oil prices on the New York Mercantile Exchange made for another moderate increase in retail heating oil prices today. Anticipation of a positive jobs report released by the federal government was the main force behind rising prices on Thursday, as the NYMEX and other markets are closed today for the Good Friday holiday. That hopeful anticipation turned out to be well founded this morning, when the report showed that the US added 162,000 jobs in March, the biggest gain in three years. Traders see the big upswing in employment as a sign that the US economy is on the rebound that will drive up demand for petroleum products. Expect additional oil price increases in reaction to the jobs data when markets re-open on Monday.

Today’s average retail heating oil price in the Northeast is 4 cents higher than Thursday’s average price.

Crude oil prices over the course of today, April 1. (image: ft.com)

Reports of manufacturing growth in the US, China, and Europe showed that the global economy could be recovering, which would spur rising fuel demand across the globe. Traders also looked ahead to a report on US payrolls that will be released on Friday, and which many expect will show that the US economy added jobs in March. Because NYMEX is closed on Friday for the Good Friday holiday and oil traders won’t be able to respond to the report’s actual release, the expectation of positive economic news was factored into oil prices today, pushing the prices of crude and heating oil higher.

Today’s closing prices on NYMEX

Crude oil (May 2010 contract): Up 1.2 percent, $84.75 per barrel.
Heating oil (May 2010 contract): Up 1.6 percent.