BP's (BP.) 64th Statistical Review of World Energy paints a picture of markets in a state of flux; caught between accelerating non-OPEC oil production and the slowing pace of Chinese industrialisation. Energy prices have obviously been undermined by excess supply, but the opposite side of the equation is also playing out, thereby intensifying institutional anxieties over long-term exposure to energy markets - or, at least, some of the more traditional areas. For retail investors, 'volatility' will again prove to be the watchword as previous assumptions linked to the trajectory of energy demand in the Asia Pacific region are put to the test.
According to the World Bank, the global economy expanded by 3.3 per cent in 2014, but the concurrent increase in primary energy consumption slowed to just 0.9 per cent. With the exception of the period immediately subsequent to the global financial crisis, that represents the slowest growth rate of the new millennium.
China's long march to consumerism
The disparity is probably explicable in terms of China’s transition from an energy-intensive industrial base; the economy of the People's Republic grew by over 7 per cent last year, though energy consumption increased at less than half that rate. But it's not just about boosting China's services sector; the Beijing government has also introduced ultra-low emissions targets across many coastal provinces, which are stifling growth in energy usage.
In addition, a fall-away in construction starts meant that demand growth for steel products in China - which accounts for around half of global consumption - entered negative territory for the first time in 20 years. Steelmaking requires huge energy inputs through the utilisation of metallurgical and thermal coal - and inventories for bulk mining stocks take months to diminish and then replenish.
India steels itself for growth
With steelmakers struggling, it's unsurprising that the Review shows production increasing for all forms of fuel with the exception of coal; inventories remain stubbornly high and demand from Europe and the US should trail away this year following a relatively strong performance in 2014. However, it's conceivable that India will take up at least some of the slack between now and 2025. Indian companies plan to invest around 2.94 trillion rupees (£30bn) to bump up the country's steel production capacity from 88m to 300m tonnes over the next 10 years, according to government sources in Delhi.
Ironically, corporate India's ability to achieve this objective could well be stymied by the country's persistent energy deficits, although another familiar stumbling block on the subcontinent - delays in securing regulatory clearances - has been addressed through recent amendments to land acquisition laws. How successful these changes will prove to be is anyone's guess, but they do suggest that Narendra Modi's government is serious about its reform agenda. India is already the world's third biggest end-user of coal behind China and the US, but consumption is flat-lining (at best) in those economies, whereas it increased by over 11 per cent in India during 2014.
India's take-up of coal-fired energy is obviously at odds with global trends - at least among the developed economies - but it suggests that the recent G7 pledge to phase-out fossil fuel use by the end of the century amounts to little more than the usual PR wheeze. The developing world needs affordable sources of power generation to drive economic growth - and this imperative is pressing. The BP statistics bear this out, as the bulk of double-digit percentage increases in coal consumption were confined to fast growing economies in South-East Asia and Africa. The take-up - as a proportion of global output - certainly won't prop up thermal coal prices through 2015, but it underlines why it would be folly to ring the death knell for our dirtiest fuel source prematurely.
Green is the new black
It may well be that the pursuit of clean energy is incompatible with rapid, large-scale industrialisation. But it's certainly true that the most prodigious growth rates in the Review are linked to renewable sources of energy. This is to be expected given that it still constitutes a relatively low proportion (3.2 per cent) of the global energy mix, although it accounted for a record 6 per cent of worldwide power generation, and one-third of the overall increase in primary energy use.
It's worth noting that due to the sharp slowdown in world energy consumption, coupled with the increased prevalence of renewable technologies, global CO2 emissions grew at their slowest rate since 1998 (again, excluding the immediate aftermath of the financial crisis). So unless you're living in an emerging market economy, you can breathe a little easier tonight.
The fuel source that dare not speak its name
Policy strategists in most economies, or at least most advanced economies, believe a broad-based mix of power sources provides the most effective way of guaranteeing energy security, while meeting environmental targets on greenhouse emissions. This helps to explain the continued rise in both solar- and wind-powered generation, but post-Fukushima Daichii, nuclear energy has been the fuel source that dare not speak its name. Germany immediately pulled its nuclear programme in the wake of the disaster, while other European nations enacted laws that effectively halted the construction of new nuclear power stations. And last year, Japan took its last operating reactor off-line, albeit for remedial maintenance.
Nevertheless, the 2015 Statistical Review lends credence to our view that this fundamental energy source is set for something of a comeback. Despite the (temporary) outage in Japan, global nuclear output grew by an above-average rate of 1.8 per cent in 2014 - the second consecutive annual increase, with France, China and South Korea driving the expansion.
The Review revealed that consumption growth rates in 2014 contracted for every global fuel source, with the sole exception of nuclear energy. The number of nuclear power reactors currently under construction worldwide is equivalent to a fifth of existing global capacity. And there are many more that are well advanced through the planning stages. Even the prospect of Japan making a return to the nuclear fold increased recently, following a favourable legal ruling linked to the restart of two reactors at the Sendai nuclear power plant - more could follow over coming months.
USA, USA, USA!
Of course, the general decline in global energy usage is reflected in petroleum markets. Though average Brent crude prices were down 9 per cent on the previous year, global oil consumption increased by just 0.8m barrels a day (bopd), well down on the 1.4m bopd rise during the previous year. Predictably, the net increase was wholly attributable to countries outside the OECD. Tighter rules on engine emissions and improved fuel efficiencies are having a profound effect on demand levels in advanced economies; last year, Japan's oil consumption fell to its lowest level since 1971.
The BP statistics show that the growth in total oil production - 2.1m bopd - was more than double the rise in consumption. The increase was down to non-OPEC producers, primarily the US, which alone accounted for three quarters of the excess. The BP analysis points out that the US became the first country to have increased output by at least 1m bopd for three consecutive years.
Nobody really foresaw, or at least appreciated, the extent to which North American unconventional hydrocarbon production would alter global energy markets, but with Uncle Sam overtaking the Saudis as the world's biggest oil producer, how long will it be before other nations press ahead with their own unconventional programmes? It's little wonder that long-term projections on crude prices are being continually pared back. Volatility will tend to hold sway; good news for big global oil traders like Trafigura, Mercuria and Vitol, rather less so for small-scale or low-margin producers.
The US also logged the largest volumetric increase in natural gas production, accounting for 77 per cent of net global growth. The worldwide natural gas trade contracted through 2014 - a relatively rare phenomenon in recent years. While both global consumption and production fell well below their 10-year average growth rates, due largely to a dramatic fall-away in pipeline exports from Russia and the Netherlands. (The accompanying chart shows the impact on hub pricing). The one bright spot centred on a 2.4 per cent step-up in LNG trade, with imports into China and the UK increasing by 10.8 and 20.1 per cent, respectively.
Volatility - the new normal
BP's head honcho, Bob Dudley, said that "the volatility and uncertainty that characterised 2014 felt like a return to more normal conditions". As a 30-year industry veteran, Mr Dudley obviously takes a long-term view of energy markets. But his take on existing market instability is backed by recent research from the World Energy Council, which suggests that erratic pricing could become "the new normal" due to external price levers.
For a start, it's obvious that beyond the standard fundamentals, energy providers and primary suppliers are increasingly in thrall to interventionist policies. The establishment of a meaningful global climate framework - or even the move toward it - has already become a key critical uncertainty for energy analysts. And there are the knock-on effects to consider: the increased adoption renewable power generation is driving the development of national- and transnational grid systems that can adapt to greater unpredictability of supply. Capital is now being allocated as much in response to regulatory policies as market fundamentals.
