There's also the 'law of unintended consequences' to consider. The welter of predictions about how the rise of the unconventional oil and gas industry is transforming the US economy has convinced politicians on this side of the Atlantic (and elsewhere) to follow suit. Due to the expansion in oil production from areas such as North Dakota Bakken and Eagle Ford in Texas, Uncle Sam could well be on track to becoming the world's largest oil producer over the next decade. But the growing success of the US shale oil industry throws up a theoretical scenario in which global oil prices could collapse rapidly. While we think this is improbable in the near term and is likely to be short-lived if it does happen, there's no doubt that the projected fall in US crude imports, and the compelling fiscal demands of some OPEC member states, could combine to destabilise global oil markets.
A crude take on US shale
Global crude oil consumption ticked up by 890,000 barrels per day (bopd), although the increase was entirely down to economies outside the OECD. In fact, OECD demand for crude oil has now contracted in six out of the last seven years. The shale revolution under way in North America added another 1m bopd to US production through 2012, and has been a major factor in bringing down aggregate imports to 7.5m bopd - a 36 per cent fall from the 2005 peak rate. According to the Paris-based Energy Information Administration (EIA), US unconventional oil production has already brought down Brent crude prices by $20-$25 a barrel, and this downward pressure will remain a feature of the market through the remainder of this decade. It's not all about energy prices, though. The unforeseen scale of the US production surge is likely to have profound geopolitical implications - and not altogether pleasant ones at that.
Opec going spare
Earlier this month, Opec ministers met to re-evaluate export strategies in response to the sharp fall in US imports. The problem for some Opec producers, such as Nigeria and Algeria, is particularly acute given their over-reliance on exports to the US, but oil ministers from Saudi Arabia and the Gulf States remain seemingly unperturbed by the growth of US shale output - at least publicly. The trouble is, of course, that every barrel of imported oil that the US replaces with domestic production effectively increases Opec spare capacity at a time when the cartel's ability to support prices is being eroded. Saudi Arabia isn't overly exposed to the US with exports of around 1.4m bopd (this figure, coincidently, is the current annual rate of demand growth for non-OECD countries). However, it's starting to dawn on Opec oil ministers that there just isn't the level of new demand that analysts had been predicting as little as 18 months ago. Put simply, if US crude imports continue to fall, then the likes of Saudi Arabia, Venezuela, and Iraq will somehow need to find alternative markets for their output, or cut back production, which brings us on to another potential headache for Opec.
The cartel's oil ministers recently reaffirmed a production ceiling of 30m bopd. The trouble is that not every Opec member state is happy with its individual allocation. Iraq lays claim to around a fifth of the world’s conventional reserves, but the country needs a lot of cash to repair its infrastructure after it was liberated by Dick Cheney & Co. Instead of the current export rate of 3m bopd, Baghdad is intent on driving this towards 7m bopd - a huge increase considering that the global economy is already oversupplied. Perhaps the Iraqis are mindful of China's plans to lessen the risk of supply disruptions by building storage facilities that will hold 500m barrels of emergency oil reserves prior to 2020.
The nightmare scenario
However, with their national budgets under unprecedented strain, Iraq is just one of a number of Opec states that now wants to generate as many petrodollars as possible. But if member states become reluctant to cut output as part of a concerted effort to underpin prices, then the organisation would be rendered an irrelevance overnight. That's still unlikely, but Opec needs to put its house in order if it's intent on wielding the same level of influence in the future.
Of course, the nightmare scenario for Opec is if other countries with significant potential shale oil deposits - say, China, for example - follow the US lead. If such a scenario was to unfold, it could lead to a deluge of oil in world markets, and a consequent collapse in crude prices. We tend to think that such a price collapse would be a short-lived phenomenon. That said, the 'Arab Spring' added weight to the view that the internal security of Saudi Arabia and the Gulf States is linked to their ability to continue funding generous social programmes through high oil prices - once that goes, the sheesh will hit the fan as it were.
Black lung in the People's Republic
Purely as a consequence of Chinese demand, coal remained the world's fastest-growing fossil fuel in 2012, but the rate of consumption increased by just 2.5 per cent (well below the 10-year average of 4.4 per cent). China now accounts for over half of global demand, but industrial usage could continue to falter on the back of new environmental legislation.
This assumes, of course, that the new administration in Beijing is genuinely serious about combating the spread of respiratory illnesses in built-up areas. Ironically, some domestic economists now believe that air quality in many of the country's high-density urban areas has deteriorated to such an extent that it is imperilling the very growth that caused the problem in the first place. However, the willingness - or indeed ability - of China's central government to follow through with enforcement measures at the regional level is still open to question.
But even if the political will is there, the logistics are such that China's coal-powered generators will be belching out dioxides for a while yet. Even with China's industrial might, it will take decades, rather than years, to develop enough gas-fired turbines to make a difference. Admittedly, China managed to generate an additional 12.5 per cent of energy through nuclear fuel last year, but the nation still only produces about the same amount of juice as Germany. That's about to change: China operates 15 nuclear reactors at three separate locations. But there are another 26 under construction, meaning that within just five years, it will be getting electricity from 41 nuclear reactors. But with other countries intent on reducing their nuclear power base, the outlook for uranium producers remains uncertain.
Tokyo's dash for gas
World natural gas consumption increased by 2.2 per cent, which equates to 50 basis points below the long-term trend average, but there were big increases recorded in the world's three largest economies: US (4.1 per cent); China (9.9 per cent); and Japan (10.3 per cent). Interestingly, growth in OECD demand outstripped that of the non-member states for the first time since the turn of the millennium.
We do not believe this is an indicator of a coming gas 'super-cycle', although the recent step-up in LNG demand from Japan (post Fukushima) highlights the role of external variables in shaping energy markets. Japanese nuclear power output fell by 89 per cent last year. As a result, the country now sucks in around 36 per cent of global LNG imports - well over double that of South Korea, the next biggest importer. Japan's ability to accelerate its nuclear re-starts will be the principal determinant in global LNG markets over the next couple of years, rather than any theoretical catalyst.
Increasing diversity of sources
Where are global energy markets headed, then? It is predicted that within a decade or so, the fossil fuels will converge to a global market share of 26-28 per cent, but this assumes only a modest pick-up in shale gas production outside North America. To date, the shale gas boom has largely been confined to the US and Canada, but political interest is now being seen in Europe and beyond. In terms of LNG, there seems to be consensus that, even factoring a slowdown in China's economy, there is sufficient global demand to soak up the capacity coming onstream between now and the end of 2014. Energy stocks constituted 42.5 per cent of our recently published 'Ultimate Resources Portfolio', so we remain resolutely bullish about the long-term investment prospects of this segment of the market. But for investors, the latest BP Review does highlight the importance of being able to respond to the flexibility of world energy markets, with supply coming from an "increasing diversity of sources". Therefore, you may need to be a little more nimble in your portfolio allocations in order to exploit this trend.
