While the overall oil and natural gas depression has now extended more than two-and-a-half years, the negative impact of this unanticipated downdraft is generating alarm among many PVF distributors in the large swath of states depending on energy-oriented business growth and maintenance.
While a similar unexpected downturn in the early 1980s was sharp but relatively short, it put out of business Grant Supply, the only billion-dollar Texas-based distributor. A few others also succumbed at that time, but the beginnings of a rebound during the President Reagan-administered 1980s and the inflation moderation of the 1990s proved supportive of residential, commercial and industrial construction, maintenance/repair and export growth.
To top off the recovery from the financial crisis (2008-11), fracking surged, as did domestic energy development and the productive services needed for its stupendous growth. This opened the doors for substantial bank loans made available by financial institutions to greatly expand PVF distribution’s capabilities.
As such shales as Permian, Marcellus and Bakken Belt proliferated, the need for PVF-related components multiplied in demand. This not only increased the volume and product availability needs of oil and natural resource energy-related components, but greatly increased the financial value of PVF distribution. This led to the multi-million-dollar combination of McJunkin and Red Man Supply (MRC) and the establishment of the Ferguson Industrial Wolseley Group, the current industry’s largest, in terms of revenues generated.
Both the length and the extent of oil’s calamitous price drop is putting additional pressure on PVF distribution in America’s Southeast and Southwest geographic sectors where most of the oil and natural gas production is generated.
Discussions with PVF distributors and master distributors, which normally carry large inventories of both sizes and types of PVF products in times of strong business periods, indicate a relatively pessimistic outlook transcending the rest of 2016 and the first quarter of 2017. This has resulted in much smaller inventory carriage and cutbacks in personnel, as well as facility maintenance.
Despite the bright picture envisioned by natural gas production and sales growth, the settling of oil prices in the mid-$40 range has caused grave concern among most of these distributors contacted.
The natural gas outburst
Natural gas, considered by experts as the dark horse of the fossil fuel triad that includes coal and oil, is verging on a major outburst in the coming year. This belief is supported by the following factors:
1) A mere 20 years ago, the U.S. electricity sector used more than 4.5 times as much coal by energy value as natural gas. Last year, coal barely surpassed usage of natural gas, a shift due to reverse in the immediate future. By mid-year 2016, U.S. power producers consumed an all-time record natural gas usage, while coal shipments by rail are down 25% this year, according to the Association of American Railroads.
2) According to the U.S. Energy Information Administration, overall U.S. natural gas production has fallen continuously this year. This has brought the number of active rigs drilling for gas in North America to an all-time low of 81 in August (according to oil service giant Baker-Hughes). Only eight years ago, in mid-2008, it had reached an all-time high of 1,600 monthly units.
This has stoked incomparable demand for natural gas, quickly dissipating the long-term natural gas glut that had developed as a result of this by-product to oil, due to record fracking. This, in turn, had brought prices down to as low as $2 per one million Btu, the universal natural gas price measurement, within the last year.
3) The extremely cheap price of natural gas has motivated the chemical industry to focus increased production in the U.S., due to this element’s cost advantages. Overseas, natural gas prices are averaging four to five times that of the U.S.
While such natural gas producers as Chesapeake Energy and Exxon Mobil are rapidly anticipating the conversion of natural gas to liquids (LNG), this is awaiting conversion capability development, as well as shipping ports, such as in Freeport, Texas, already underway for international export.
These developments likely will move the future price of natural gas well above the present lows, which have stimulated major demand additions. However, such price gains will likely not become exorbitant enough to cause prospective exporters of liquefied natural gas to curb anticipated projects. Instead, they will likely double or possibly triple the present natural gas pricing levels — still well below the prices now paid for this fossil fuel in Europe and East Asia.
Like all major emergences of growth commodities, a balance between massive growth demand and reasonable pricing levels will be the ultimate result, as U.S.-produced natural gas takes its competitive place throughout world markets.
New pipeline development
A rapidly developing U.S. corporate energy pipeline infrastructure is quickly taking shape, even as the federal government has taken no action in focusing on a national upgrading of badly depleted piping systems. This goes along with dams, bridges, railroad tracks and highway systems desperately in need of upgrading.
While Kinder Morgan kicked off this private approach by consolidating a number of “independents” a few years ago, the forthcoming merger of Canada’s Enbridge with Spectra Energy gives the nation’s energy pipeline system growth a solid shot in the arm.
The new enlarged Enbridge will have an enterprise value of $127 billion, vaulting it ahead of Kinder Morgan’s $93.7 billion. But this attempt to begin closing the yawning infrastructure gap still waiting for a national approach is a small step in an ever-widening problem.
It should be remembered the near trillion-dollar “restructuring” bill, passed by Congress in February 2009, was never used for the purpose intended, but found its way instead into “renewables,” such as solar power panels, wind and even nuclear power, as the incoming governmental power structure made its opposition to fossil fuels (coal, oil and natural gas) very clear.
This was unlike President Franklin D. Roosevelt, who poured his Depression-fighting resources into hundreds of thousands of jobs, as well as various organizations (WPA, PWA, TVA, etc.) to accelerate infrastructural capability and ease the impact of the Depression.
While the private pipeline systems herald a valiant start toward a multitude of waiting infrastructure problems to be resolved, it becomes an urgent, optimistic hopefulness that the incoming presidential and congressional administration will put “internal development” ahead of its original spending activities; along with easing the stifling U.S. government regulations, as well as taking a new, realistic look at impotent “climatological purity” actions.
U.S. an energy superpower?
While the fracking surge has lifted U.S. oil production to as much as a record 12 million barrels a day along with Saudi Arabia and Russia, and natural gas production as high as Qatar and Algeria, America also has gained global top positions in geothermal power and nuclear activity.
Even in the arena of renewables, which has been pursued aggressively by the Obama administration, the U.S. is either leading or challenging those nations which are claiming top position in wind and solar power. Certain nations claim to be the ultimate when it comes to wind, geothermal and nuclear when focusing on their greater per-capita basis of measurement. For instance, Iceland contains a huge reserve of geothermal power when considering its tiny population of 330,000. A similar situation is true of wind farmers in Denmark, a small European nation (5.7 million population) whose per-capita wind power output is very high. But the U.S. produced 14 times more electricity from wind than Denmark in 2015.
France derives 75% of its electricity from nuclear power, but its 437 terawatt-hours of nuclear power consumed in 2015 was just more than half of the 839 TWh consumed in the U.S. in 2015. While China is far back at 171 TWh consumed in 2015, this marks a doubling of Chinese nuclear power consumption in just the past four years. While the U.S. also remains king of the hill in nuclear, China’s growth in this energy sector along with other energy sub-sectors indicates it as the main U.S. challenger in the next decade.
U.S. energy world domination today is best expressed by its unexpected acceleration of natural gas production, surpassing Russia in 2015 for the world’s top position. By 2015, U.S. natural gas production was 34% above Russia’s and had surpassed Saudi Arabia to claim the world leadership in this fast-growing fossil fuel.
In effect, these factors have put the U.S. well ahead of any other single nation in overall energy production, including oil, natural gas, wind power, geothermal power and biofuel, etc. Even its fast-disappearing coal production is still in the No. 2 position to China’s expanding pickup.
In fact, all categories where the U.S. is now the world leader, China is in the runner-up position, indicating a natural resource expansion not previously attributed to that nation’s miraculous overall economic growth expansion.