Energy Musings - January 24, 2025
My latest column in Ocean News & Technology magazine. This is an industry magazine covering all aspects of ocean technology. It is free to subscribers and worthy of reading.
Next Trump Era Will Bring Greater Focus on Energy
Ocean News & Technology
5,390 followers
January 23, 2025
When the Biden administration announced more sanctions on Russia’s oil industry—producer CEOs, crude oil traders, ghost fleet tankers, and oilfield service companies—investor views shifted for when the global oil supply/demand would balance, sooner than anticipated.
Crude Oil
The result was crude oil prices rising from below $70 to almost $80 a barrel. As our chart shows, oil prices are suddenly back to the central value that existed for most of 2024.
Following Donald Trump’s inauguration, his speeches and comments referenced his focus on promoting America’s energy to reduce inflation. So, it was not a surprise that crude oil futures prices declined. Of course, the day was also a national holiday, which likely limited oil trading volumes.
While emotional reactions to policy comments might have impacted the day’s oil price, there is no question the global oil market has changed. Energy is what makes the world’s economy operate. Without petroleum, economic growth stops. Global economic growth can accelerate if energy prices can be reduced and sustained at a lower level. It will require more oil supply. However, oil prices cannot fall too low—below the breakeven price for new oil exploration—or supply will not arrive, and a future oil price spike will deliver a devastating economic fallout.
“Drill, baby, drill” does not describe what the petroleum industry will do. It is a mantra for exploiting our domestic resources. Producers will continue to exercise caution in their capital spending. They understand that embracing financial discipline requires spending at levels that sustain and slightly increase their production while returning excess cash flow to investors.
Trump believes in regulating the energy industry less. He is expected to enact policies that limit the subsidies for renewable energy. Without subsidies, renewable energy will struggle to grow. The Trump administration will not support backdoor regulations that restrict Americans’ freedom to choose the vehicle they wish to drive. Over-the-road truckers will not be arm-twisted to junk their diesel trucks for inadequate electric trucks. These actions will be good for gasoline and diesel demand.
Our other chart shows US crude oil and refined product inventories for each year from 2020 through 2024. COVID-19 caused the shutdown of economies worldwide. In the US, the economic shutdown drove up oil inventories. The pandemic-driven oil exploration and development slowdown resulted in nearly two years of supply contraction. January 2025’s petroleum inventories are at 2022 levels—low compared to prior years. This is a good starting point for the Trump era.
Natural Gas
An earlier and colder winter than experienced in the past two years has pushed natural gas prices to levels not seen in years other than in one isolated event. Cold weather is not the only factor contributing to the rise in gas prices. Electricity demand is growing after years of flat to declining consumption. The demand is driven by the explosion in Artificial Intelligence computing. AI means more computing power is needed, and for many of the applications envisioned, it means serious power demand increases.
The tech companies pushing AI while we are electrifying everything as part of the government-mandated push for a clean energy transition have utility companies worried about their ability to increase generating capacity in step with demand growth. Some utilities are projecting electricity demand growing at upper single-digit or higher rates. This follows decades when power consumption increased by just one or two percent per year, if it increased at all.
The new Trump administration will be enacting rules that are less supportive of renewable energy. The low-capacity factors of wind and solar power mean significant overbuilding of renewable generating capacity to get enough new supply to meet demand. Additionally, wind and solar are weather-dependent. That means utilities must have backup power supplies when the sun doesn’t shine and the wind doesn’t blow. Electricity grids must balance supply and demand by the second. Therefore, backup power must be able to ramp up output rapidly, which has favored gas-fired generators. Yet, another natural gas demand driver.
Lastly, the US exports record volumes of liquefied natural gas to Asian and European markets. The latter is also struggling with an earlier cold winter. As a result, European gas storage is being depleted faster than expected. This means power companies are seeking foreign gas supplies aggressively, even outbidding Asian buyers for US LNG cargoes.
Surprisingly, European gas buyers are still purchasing meaningful amounts of Russian natural gas despite the sanctions and their avowed disdain for supporting Ukraine’s enemy. This shows how significant natural gas has become as a global fuel.
As depicted in our chart, US gas storage volumes for the first two weeks of January have fallen below the 5-year maximum storage volumes. Gas consumption soared due to the recent Polar Vortex, which brought bitterly cold weather from the North Pole to Canada and the Gulf Coast. This could become a problem because cold weather can impact gas production, as the liquids contained in the gas flow can freeze and shut off well output. Should that happen, we could see gas storage volumes fall sharply in the next few weeks, taking them well below the 5-year average over the next several weeks. That scenario would send natural gas prices higher. However, the question for customers, producers, and traders is whether gas prices remain elevated to encourage producers to boost output. Winter energy bills could be higher than expected, but it will ensure adequate future gas supply.
The International Energy Agency says the world is entering the era of electricity. If true, then the age of natural gas will be extended. Natural gas is becoming the key fuel powering world economies. Natural gas will eventually displace coal generation, providing the bridge to our next energy source, which will likely be nuclear more than renewables.
By Allen Brooks Senior Fellow of the National Center for Energy Analytics & ON&T Columnist
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