- World Awash In Oil; Demand Lacking Says IEA
- Energy Stocks Experience Difficult First Quarter
- Commodity Price Actions Suggest Glimmers of Recovery
- Pricing Carbon: Restructuring the Energy Industry Begins
- 2009 Hurricane Forecast Dampened By Cooling Waters
- Energy Plays A Key Role In 7 Deadly Scenarios
: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies. The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations. Allen Brooks
World Awash In Oil; Demand Lacking Says IEA (Top)
On Friday the International Energy Agency (IEA) cut its forecast for global oil demand by one million barrels per day (b/d) to 83.4 million b/d. That means the world will be using approximately 2.4 million b/d less than in 2008, or roughly a 3% decline from a year ago. This matches the first year decline experienced during the 1979-1983 period, but the IEA does not expect this industry downturn to last four years like the earlier one. The downward demand revision was made as the IEA used sharply reduced economic growth forecasts to project oil consumption. Much of the demand reduction is due to weaker oil consumption expected in developed economies such as the United States, but demand is falling in developing economies, also.
The IEA is now anticipating China’s oil demand to shift from a small increase to about a 1% decline, or roughly an 80,000 b/d decline from its prior consumption forecast. The IEA pointed out that China’s oil consumption fell about 6.9% in January-February from last year. China’s news last Friday that its crude oil imports hit a one-year record high, suggesting better consumption for March was not available at the time the IEA made its revised forecast. If the IEA’s projection for an oil demand decline in China proves accurate, it will mark the country’s first annual decline in 19 years.
We found the chart of the growth rate in China’s construction and its implied steel demand interesting when considered against the country’s oil demand. What one sees is that in the first years of the period, 2000-2004, construction and steel demand growth was quite high, peaking in early 2004 at close to a 40% annual growth rate. In the following four years, the growth rate was considerably less than in the earlier period with the brief exception of the pre-Olympics period in 2007 and 2008. Construction demand fell steadily throughout most of 2008 until demand went negative in the last half of the year. Demand has rebounded in early 2009, but clearly the IEA doesn’t believe this is a measure of healthy future oil demand.
Exhibit 1. China’s Construction Drives Material and Energy
Source: US Global Investors
The annual growth in China’s oil demand follows the pattern of growth for the country’s construction and steel demand. In the early years of the period, annual oil demand growth was noticeably stronger than in the recent years.
Exhibit 2. China’s Growth In Oil Follows Construction Demand
BP, IEA, PPHB
Global oil demand remains the key to oil prices in 2009. Falling oil production will become a greater factor in the supply/demand balance as we move through 2009 and into 2010. OPEC’s continued discipline in holding its output to the cartel’s reduced December production quotas will be important, but with surplus capacity of roughly 5.5 million b/d out of total global demand of 83.4 million b/d, or 6.6% of the total, the world is not very far out of balance. The IEA says it expects non-OPEC supply to fall by 320,000 b/d in 2009. Based on the report released Friday by the Alaska Department of Revenue, North Slope production will fall by 5% in the next fiscal year starting in June, and the drop would represent about 10% of the IEA’s forecasted fall in non-OPEC supplies. But possibly more important is the IEA’s identification of about one million b/d of gross pumping capacity of new supply that would have come into production in 2009-2010 that has been either delayed or canceled.
We believe there is sufficient uncertainty about a number of demand and supply drivers that one has to have a low level of confidence in forecasting the direction of the global oil market over the next five to ten years. While many people will focus on the supply challenges facing the petroleum industry, we remain convinced that understanding demand dynamics may be the most helpful in charting the future course for the oil markets. We are only confident in knowing that whatever we forecast, it will most likely be wrong. Hopefully we can at least get the direction right.
Energy Stocks Experience Difficult First Quarter (Top)
The S&P 500 Index experienced an 11.7% loss for the first quarter of 2009 while the index’s Energy sector generated a slightly worse quarterly performance with a 12.1% loss. Of the S&P 500’s ten industry sectors, only Technology produced a positive investor return for the first three months of 2009. In looking at the first quarter performance of the industry sectors, it is noteworthy how many of the sectors generated fairly similar returns. While Technology generated positive return, the Materials sector was close with only a 2.8% loss for the quarter. At the other end of the spectrum, Financials and Industrials each reported greater than 20% losses. Of the remaining six sectors, three produced almost exactly the same results of 8.5% losses while the balance of the sectors, including Energy, had losses ranging from 11.3% to 12.1%. The quarterly results were helped considerably by a strong and positive market environment in the closing weeks of the quarter.
Exhibit 3. Energy Stocks Perform In Line In 1Q
Source: Bespoke Investment Group
Energy stocks have done better in recent weeks as crude oil prices have improved. For many energy companies highly dependent upon natural gas markets for activity, the steady decline in gas prices since last spring and the prospect of further gas price weakness due to chronic oversupply suggests energy stocks will continue to struggle in the stock market in the coming months.
Exhibit 4. Crude Oil Prices Strengthen With Weaker Gas Prices
Source: EIA, PPHB
The stock market rally of the past four weeks has been quite impressive. The lows for the Dow Jones Industrial Average (DJIA) and the S&P 500 Index coincided on March 9th. From then to April 9th, the DJIA was up 23.5% while the S&P 500 gained 26.6%. Measured from the same point, the AMEX Oil Index (XOI), the Philadelphia Oil Service Index (OSX) and the AMEX Natural Gas Index (XNG) have risen by 14.4%, 26.0% and 25.9%, respectively. The interesting point about the energy sector is that the lows were actually made a few days prior to the lows for the overall stock market indices – March 2nd for the OSX and XNG and March 3rd for the XOI. There doesn’t appear to be a strong correlation between the rise in oil prices and the performance of the energy stocks since crude oil prices bottomed in mid February some several weeks ahead of the lows for the energy stocks.
Probably the most notable point is that measured over the entire period from December 31, 2008, through April 9, 2009, the DJIA was down 7.9% while the S&P 500 was lower by only 5.2%. In contrast, the OSX was up 14.9% and the XNG was slightly profitable at 0.9%, although the XOI was down by 8.9%. The only possible explanation we can offer for this difference in performance is that small market capitalization stocks generally have performed better than large market capitalization stocks. The OSX is generally composed of stocks that easily fall into the small cap arena. Does this show that stock market characteristics may have a greater role in performance than industry fundamentals? There is no doubt that oil service companies are facing weaker activity measures and increased
Exhibit 5. Energy Stocks Enjoy Strong Recent Price Recovery
Source: Yahoo Finance, PPHB
pricing pressure meaning that earnings for the companies will be declining in future quarters. Therefore, for energy stock prices to be rising investors must be counting on either a quick turnaround in the industry’s fortunes or they are buying small company stocks with the belief that this market segment will achieve greater percentage appreciation than large cap stocks as investment funds flow into the stock market. We are happy with either explanation. What we are concerned about is the possibility that investors may have been driven away from the stock market due to the horrendous bear market devastation of stock prices over the past 12-18 month period.
It is interesting to note, based on the results of a recent investment analysis, that at any time from 1980 through 2008, if an investor owned 20-year treasury bonds and rolled them over every year, he would have beaten the returns produced from investing in the S&P 500 Index through January 2009. In fact, one can go back 40 years to 1969 and a 20-year bond investor still wins the return battle, but by only a marginal amount. This performance is quite striking as the 40-year period includes the very bad bond market period experienced during the high inflation period of the 1970s.
Starting in 1802, stocks have beaten bond returns by about 2.5 percentage points, which, compounded over two centuries is a huge differential. There were, however, periods during this two century span when bonds did beat stocks – the 68-year span in the early 1800s, the 20-year period around the Great Depression and this modern period. The challenge for equity investors is that increasingly comments and analyses are coming forward pointing out how stock market investors lost money over the past ten years, which is being used as an indictment of the “buy-and-hold” investment philosophy associated with long-term investors.
Exhibit 6. Bonds Outperform Stocks In Brief Past Periods
Source: Prieur du Plessis
Therefore, the new investing mantra is becoming “buy bonds for the income security,” although seldom is pointed out the risk of capital loss, which is quite high should inflation accelerate as a result of the government’s economic stimulus efforts. The other view being expressed about equity markets is that investors should only be in the stock market as traders and not investors. This implies that ‘news, views and rumors’ may have greater influence on stock price performance than company fundamentals and/or its financials. If this latter view holds, then we could be looking at a permanent increase in stock market volatility.
We remain optimistic that investors will not withdraw from the equity market permanently. If they do, and we rate that risk somewhat high (although not the most likely scenario), equity valuations will suffer. Instead of valuations returning to the levels experienced during the past 10 years, we may instead be looking at valuations closer to those experienced in the 1970s in which price to earnings measures were in the single digits rather than the mid teens as in recent years. That will not be good for investor long-term returns.
Commodity Price Actions Suggest Glimmers of Recovery (Top)
The 2009 cumulative returns through March for the commodities we track suggest the emerging signs of economic recovery may be impacting prices. The final two columns in our chart in Exhibit 10 (at end of section) show the cumulative performance for these commodities for the first two months through February and then for the three months through the end of March. At the top of the 2009 performance ranking is copper with almost a 42% cumulative performance this year, up from its second place ranking through February when that commodity had only an 18.6% price appreciation.
The small signs of economic recovery – the uptick in the Baltic Dry Index, U.S. housing starts, U.S. durable goods orders and Chinese economic data – are being mirrored by the performance of various economically sensitive commodities such as copper, platinum, palladium and lead. While aluminum experienced positive monthly price appreciation during March, its improvement was nowhere near the strength of monthly gains reported by copper, lead, zinc and palladium. A leading commodity trader, Dennis Gartman, publisher of The Gartman Letter, commented on CNBC Thursday morning that he was buying economically sensitive industrial commodities, or ones he describes as “hurting your foot if you drop them.” He also mentioned lumber as a commodity showing increasing strength, which he attributes to recent improvements in new housing starts. He indicated he had been looking at agricultural commodities – wheat, soybeans and corn – but thought that there were too many variables in play that give him little confidence in the near-term future price action of these commodities.
Copper is considered the leading commodity measuring economic conditions since it is used in housing, automobiles and many industrial manufacturing processes. Copper demand in China has been a leading indicator for the health of its economy. A factor in China’s copper market is the availability of scrap market supplies. The following two charts (Exhibits 7 and 8) show how scrap copper supplies have fallen dramatically in recent months coinciding with a sharp rise in copper imports. It is this condition in the copper market that has been largely responsible for the increase in global copper prices, and also a contributor to the improvement in the dry bulk shipping sector. We understand that many other industrial commodity markets are experiencing similar swings due to falling inventories and available scrap supplies that are forcing manufacturers to buy new raw material supplies. As these conditions continue to spread throughout the commodities market, and until material producers open up new raw material production facilities, we would expect to see commodity prices continue to rise.
Exhibit 7. Scrap Supplies Drying Up
Source: US Global Investors
Exhibit 8. Imports of Copper On The Rise
Source: US Global Investors
On Friday, China released economic data to support earlier signs of economic recovery. The key statistic was that while exports fell for a fifth consecutive month, the 17.1% decline for March was considerably better than the 25.7% decline in February. Imports to China in March fell 25.1%, which was greater than the decline in February. As a result, China’s trade surplus was $18.56 billion, greater than in February, but less than half the levels recorded late last year. While some economists cautioned that the decline in imports signaled further challenges for China’s economy since a large portion of imports are components for final assembly before export to consuming markets such as the United States, Japan and Europe, which are still economically weak.
Other positive economic news from China were that crude oil imports hit a one-year high and steel mills imported record quantities of iron ore in anticipation of a pickup in demand. Car sales hit a monthly record in March according to figures released last Thursday, marking the third consecutive monthly rise. Housing sales in major cities have also picked up in response to lower prices. And China’s National Bureau of Statistics said last week that its survey of managers’ confidence rose in the first quarter after plunging in the final quarter of 2008. While these economic statistics are encouraging, the damage that has been inflicted on the global economy will require an extended period of time to be repaired. The chart in Exhibit 9 showing the decline in global trade at the end of 2008 puts into perspective the challenge of repairing the economy.
What are the implications for energy markets if we are starting to see improved economic demand? To answer that question, we must focus on the crude oil market because the natural gas market remains a series of regional markets impacted more by local than global factors. These regional gas markets are slowly evolving into a more integrated global market, but its full transformation is still
Exhibit 9. Current Recession Hit To Trade Worse Than 1929-30
Source: The New York Times
years away. Natural gas in the United States continues to suffer from flagging demand and continued supply growth that is keeping prices under pressure.
Crude oil experienced a good month in March as its cumulative price action for the first quarter shifted from a loss of nearly 10% through the first two months of the year to become slightly profitable at quarter’s-end. Likewise, coal had a very strong monthly price performance in March and cut by almost two-thirds from its loss in the first two months of 2009. One has to believe that the price increases for these two fuel supplies reflect improved supply/demand conditions in the energy market following the evaporation of demand during the last few months of 2008 and the slow reaction by suppliers to the lost demand.
Improved industrial commodity prices support a more optimistic view of the global economy. We should not, however, assume that the world’s economy will rebound sharply or quickly from here. Substantial financial and economic damage has been done to the global economy and it will take time for the economic and financial stimulus injected into economies around the world to restore consumer and business confidence resulting in a boost for consumption and investment. Until then, we can expect periods with both better and worse economic statistics that will buffet consumer, business and investor sentiment. It, however, is better to be gauging the pace of an economic recovery than attempting to determine the “splat” point of an economic downturn.
Exhibit 10. Industrial Commodities Show Improved Pricing
Source: US Global Investors, MarketWatch, FT, PPHB
Pricing Carbon: Restructuring the Energy Industry Begins (Top)
Last week, the first UN climate talks held in Bonn, Germany in the run up to final negotiations for a follow-on greenhouse gas (GHG) emissions treaty to replace the existing Kyoto Protocol wrapped up. The United States was represented at these discussions by Todd Stern, special envoy for climate change at the state department. This is the first meeting at which the United States was not only an active participant, but has indicated it would like to be a leader on global climate change policy, a sharp reversal from the position of the previous administration. In fact, this new attitude was welcomed by the UN talks participants who roundly applauded the new U.S. negotiating team on its first appearance, but as time passed the adulation began to wear off.
The problem that being a leader on climate change policy may cause is that the resulting mandates may prove larger stumbling blocks than the Obama administration can overcome at home. This fear appears to be causing the U.S. negotiating team to drag its feet over issues the rest of the world wants to run ahead on. This reluctance to get out in front may damage the international standing of the new administration on global warming issues as well as create political problems at home for President Obama’s plan for a cap-and-trade system for pricing carbon emissions. In addition, there are the real challenges within the United States in reaching an agreement as to what the emission levels should be and when and how they should be regulated. At the present time, the U.S. and the European Union are not in agreement about the goals and timing of international carbon emission regulations, although representatives of both sides assure everyone that these disagreements can be worked out satisfactorily. At home, these issues have never had a full and fair debate.
The Obama administration, representing the United States, and the E.U. agree that they will cut their emissions by 80% by 2050, in line with the scientific advice. The problem is that there needs to be an agreement to the amount of emissions that will be cut by 2020, a key plank in the proposed treaty. The E.U. has pledged to cut its carbon emissions by 20% from 1990 levels by 2020 or by up to 30% if the U.S. agreed. So far, President Obama has only committed to reduce emissions levels to those of 1990 by 2020. If accomplished, that would result in a 16% reduction. According to Mr. Stern, this difference should not become a major bone of contention in the negotiations. As he put it, “If we reduce relatively less between now and 2020, that will leave relatively more to do 2020-2050…Our pathway accords with practical economics and political reality in a way that does not harm the environment.”
The U.S. negotiating team did not put forth a plan at the UN talks, which clearly frustrated many of the other country negotiators. The U.S. promised to have more details of its plan available by later in April and a definitive program by the next negotiations scheduled for June. At the moment, the U.S. position is that all nations, including developing countries such as China and India, would have to reduce their GHG emissions. Additionally, the plan focuses on the long-range goals of emission reductions by 2050 rather than the near-term targets proposed by the UN and the EU.
President Obama has proposed a cap-and-trade system to be implemented as part of his comprehensive energy and environment initiative. He anticipates giving some permits away but mostly charging for them. His plan envisions raising $646 billion in fees from the sale of emission credits over the forecast period for the budget. A large portion of these funds are targeted to be returned to lower income families to help them cope with rising fuel and utility bills, along with a small portion used to fund research and development of alternative fuels.
Rep. Henry Waxman (CA-D) and Rep. Edward Markey (MA-D) recently introduced a 648-page House bill dealing with carbon emissions reductions and climate change legislation that includes an extensive cap-and-trade system as the mechanism to implement the planned reductions. This is the first step in the process of developing a climate change energy policy. Under their plan, some 85% of the American economy would be covered and required to obtain emission permits. The bill does not disclose how permits would be distributed, whether they would be free to industry and businesses or whether they would have to be purchased. Also, they do not suggest what a permit might cost. Given the financial situation faced by the federal government and the proposal in the president’s budget one should assume the permits will represent a cost to industry. Provisionally, the Obama administration in its budget proposal estimated the permits will cost $20 per ton of carbon, a price that would slowly rise with tightening emission restriction standards.
The Waxman/Markey bill has the same basic long-term emission reduction goal as President Obama and the E.U. but it is more aggressive in earlier years than the administration’s plan. The Waxman/Markey bill calls for a 20% reduction in GHG emissions by 2020 and a 42% reduction by 2030. These are seriously ambitious targets given that we are talking about 11 and 21 year timeframes to achieve the goals.
What would be the demands on this country if it tried to reach these ambitious targets? David Hone, the climate change advisor to Royal Dutch Shell (RDS-A-NYSE) who attended the Bonn meetings, did some rough calculations that clearly demonstrate the challenge the U.S. economy and the Obama administration will face if they agree to try to meet these ambitious targets.
Mr. Hone starts his analysis with the following assumptions about the United States. 1) Our population will grow from 300 million people to 341 million over the period, which is consistent with the U.S. Census Bureau projection. 2) The U.S. economy will sustain a low GDP growth rate of 1.5% per year between 2006 and 2020. 3) Our emissions reduction goal will be to have 2020 emissions equal to 1990’s CO2 energy-related emissions of 4.8 billion tons. This automatically assumes that non-energy CO2 and other GHG emissions must also drop by the same amount as energy-related CO2. In 2006, energy related CO2 emissions were estimated at 5.8 billion tons, a 21% increase from 1990. Thus we are talking about reducing our CO2 emission by one billion tons by 2020 while at the same time not allowing any additional increase.
According to Mr. Hone, in order for the U.S. to achieve its goal in just over 10 years, we will need to raise our annual improvement in energy efficiency (energy/GDP) to about 2.5% per year. This could be done by getting an increase of six miles-per-gallon in total vehicle efficiency (all vehicles not just new ones); a 10% drop in total residential energy demand despite a greater than 10% increase in population; and a six percent drop in industrial energy use if one assumes that commercial energy demand rises. Electric power generation efficiency must also improve, but Mr. Hone does not quantify by how much.
He also says that we would need to restart our nuclear power industry and achieve a net increase in capacity of about 15 GW along with not allowing any drop in capacity as older nuclear power plants are retired.
The U.S. would need to install about 40,000 5-MW wind turbines, equal to about 10 new installations per day over the decade. These installations represent wind turbines that are almost 350-feet tall.
We would need to retro-fit, or build, 60 large coal-fired power plants with CO2 capture and storage systems. Today there is not one large scale commercial plant in operation. The proposed demonstration plant to be built in Illinois was killed by the Bush administration last year due to escalating cost estimates. These costs are being reviewed by the Obama administration, which may elect to go ahead with the plant possibly under the guise of economic stimulus. In order to meet Mr. Hone’s timetable, the first round of demonstration facilities (10-20 units in his view) must be agreed upon in 2010 in order to begin construction to meet the target date for all 60 plants to be in operation.
We would need to install 30 GW of large scale solar power generation facilities, both photovoltaic and solar-thermal.
Lastly, we would need to shift the total vehicle fuel supply to a mix that includes 10% advanced biofuels with a near-zero carbon footprint.
Is all of this possible? Mr. Hone believes it would be a challenge, but not impossible to accomplish. Since he can’t assume the U.S. government, let alone the American public, would embrace these steps, and certainly on the timetable Mr. Hone suggests he came up with an alternate plan. It would entail spreading the U.S. effort globally through a project approach that creates carbon-free or carbon–minimal power plants elsewhere that generate emission credits for use as offsets in the United States. He believes this solution would be equally as difficult to effect due to the U.S. Congress’ concern over exporting jobs from America. Maybe this is why the new White House science advisor, who claims that global warming is occurring so rapidly that we may have engage in eco-engineering, has proposed launching pollution particles into space to reflect the sun’s rays from the earth and slow the global warming.
2009 Hurricane Forecast Dampened By Cooling Waters (top)
The team of Professors Philip Klotzbach and William Gray of the Department of Atmospheric Science at Colorado State University (CSU) released their first revision to their initial forecast for the 2009 hurricane season. They now see this year as an average season, down from their prior assessment of it being an active season. The new forecast calls for 12 named storms, down from 14 in their December 10, 2008, initial forecast. These storms will produce six hurricanes and two intense ones, each category lower by one. While the number of named storms is above the 50-year average spanning 1950-2000, the number of hurricanes and intense hurricanes is in line with the historical averages for that period.
Exhibit 11. 2009 Hurricane Forecast Lowered
Source: CSU, PPHB
While the reduction in the number of tropical storms and hurricanes does not appear overly dramatic, there is a marked reduction in the number of storm days. What is most notable about the new forecast is how much lower it is than the storm record of the past two years. In fact, the latest 2009 forecast would compare more closely with the 2006 storm season than almost any other year in the past six years.
The new April forecast was prepared based on the professors’ new projection methodology that was used for the first time last year and proved quite good at forecasting storm activity for 2008. Without trying to explain the exact methodology, which is based on late-winter predictors and an early December hindcast, the forecasters show that their new forecasting methodology has significantly improved the hindcast record. The new methodology has correctly predicted above- or below-average tropical storm seasons in 45 out of 58 hindcast years for a 78% accuracy rate. The predictions have had a smaller error than climatology in 37 out of 58 years for a 64% performance rating. The average hindcast error is 26 NTC (net tropical cyclone) units compared with 44 NTC for climatology. The new methodology also showed improved stability when the study time period was broken in half with it explaining 59% of the variance from 1950-1978 and 72% of the variance from 1979-2007. Maybe equally as important is the new methodology correlated with observations at 0.80 for the years from 1995-2007 and at 0.85 for the years from 2002-2007.
Another step involved in preparing the forecast is to examine past hurricane seasons for ones that had weather factors similar to those that exist at the present time or have demonstrated similar patterns in the months leading up to the forecast time. The forecasting team identified five years – 1951, 1968, 1976, 1985 and 2001 – as being appropriate analog years for 2009. The CSU forecasters say that they anticipate 2009’s tropical storm season will have activity in line with what was experienced in the average of these five years.
Exhibit 12. 2009 Storm Activity To Equal Analog Year Average
Source: CSU, PPHB
While the public’s curiosity in knowing what the upcoming hurricane season will be like is one reason for the preparation of the forecast, the ultimate goal is to try to develop a system that can better forecast where storms will make landfall to help in storm preparedness. The effort at developing this system has been ongoing for a handful of years, and this year it will be expanded from the U.S. East and Gulf coasts to several of the islands in the Caribbean, but it is still a very inexact science. The highlights of the projections call for marginally higher than average landfall percentage chances for the U.S. coasts and average chances in the Caribbean.
The probabilities of at least one major (Category 3,4 or 5) hurricane making landfall on each of the following coastal areas is:
1. Entire U.S. coastline – 54% (average for last century is 52%);
2. U.S. East Coast including Florida – 32% (average for last century
is 31%);
3. Gulf Coast from Florida westward to Brownsville – 31% (average
for last century is 30%); and
4. Average major hurricane landfall risk in the Caribbean.
If the accuracy of tropical storm landfalls could be improved, it would prove to be of great value for the people at risk, local governments, first responders and insurance companies. We will be interested to see the new Caribbean island forecasts that will be unveiled in the CSU tropical storm forecast update to be issued in early June.
The four major storms that landed on the U.S coast in 2005 (Dennis, Katrina, Rita and Wilma) and caused extensive destruction, coupled with the four storms that hit the Southeast in 2004 (Charley, Frances, Ivan and Jeanne) raised questions about the possible role that global warming played in these two destructive hurricane seasons. The three Category 2 hurricanes (Dolly, Gustav and Ike) that hammered the Gulf Coast last year causing extensive damage further fueled the global warming concerns.
The global warming arguments have been given considerable attention among the media who reference recent scientific papers claiming to show the linkage. Despite the global warming of the sea surface that has taken place over the last three decades, the global numbers of hurricanes and their intensity have not shown increases in recent years except for the Atlantic basin. It is significant that while global surface temperatures have increased over the last century and over the last 30 years, there is no reliable data to indicate increased hurricane frequency or intensity in any of the earth’s other tropical cyclone basins.
In the Atlantic basin, there has been a very large increase in major hurricanes during the 14-year period of 1995-2008 (average 3.9 per year) compared to the prior 25-year period of 1970-1994 (average 1.5 per year). This increase appears to be primarily due to the multi-decadal increase in the Atlantic Ocean thermohaline circulation (THC) that is not directly related to global sea surface temperatures or CO2 increases. The THC changes seem to be primarily driven by changes in the ocean’s salinity.
As the hurricane forecasting team points out, in a global warming or global cooling world, the atmosphere’s upper air temperatures will warm or cool in unison with the sea surface temperatures. This does not appear to bear any relationship to the number or intensity of hurricanes. For the period 1945-1969 when the world was experiencing a weak cooling trend, the Atlantic basin experienced 80 major (Cat 3-4-5) hurricanes and 201 major hurricane days. In contrast, during 1970-1994 when the world was undergoing a general warming trend, there were only 38 major hurricanes (48% as many as in the earlier period) and 63 major hurricane days (31% as many). CO2 amounts in the later period were approximately 18% higher than in the earlier period.
Exhibit 13. More Storms In Cool Than Warm Times
Source: CSU
Another database the CSU forecasters compared activity and global warming against is the measurements of U.S. landfalling tropical cyclones since 1899. Global mean ocean and Atlantic sea surface temperatures have increased by about 0.4°C between the two 55-year periods studied – 1899-1953 and 1954-2008 – yet the frequency of U.S. landfall numbers has shown a slight downward trend for the later period.
Exhibit 14. Fewer Storms Of All Types Despite Warmer Climate
Source: CSU, PPHB
The downward trend is particularly noticeable for the U.S. East Coast and Florida where the difference in landfalls of major Category 3,4 and 5 hurricanes between the 43-year periods of 1923-1965 and 1966-2008 of 24 and seven is particularly large. For the entire U.S. coastline there were 38 major hurricanes that made landfall in the 1923-1965 period compared to only 26 in 1966-2008 despite the fact that CO2 averaged approximately 365 parts per million (ppm) during the latter period and only 310 ppm in the earlier one. The chart in Exhibit 15 is of personal interest as we grew up in the region of Southern New England visited by several of the 1954 and 1955 hurricanes.
Exhibit 15. More East Coast and Florida Storms In Cool Period
Source: CSU
The catalyst for the global warming concern is the record year for storms in 2005 and the spectacular destruction of New Orleans when the levees failed. The 28 storms that year, however, are not necessarily an indication of something beyond natural processes. In 1933 there were 21 named storms when there was no satellite or aircraft surveillance data. The records show that all 21 named storms had tracks west of 60°W where surface observations were more plentiful. If all the 2005 named storms whose tracks were entirely east of 60°W and therefore may have been missed by the 1933 technology were eliminated, it would reduce the total named storms that year by seven, bringing the year’s adjusted total to 21, the same number of storms as observed in 1933.
The CSU forecasters also point out that when compared to other hurricane seasons contained in the National Hurricanes Center database extending back to 1875, there were six previous seasons with more hurricanes than 2005. Those years were 1878, 1893, 1926, 1933, 1950 and 1995. There were also five prior seasons with more major hurricane days (1893, 1926, 1950, 1961 and 2004). So while 2005 was a very active hurricane year, it is not as much of an outlier as many media and scientists have proclaimed.
The damage caused by the increase in hurricanes making landfall is also not a surprising fact. With so much of the nation’s population located along the East Coast and Gulf Coast regions, any tropical storm will cause significant damage. This possibility has been forecasted as far back as 1989. The CSU forecasting team pointed out that the country was fortunate that during the early part of the current strong THC period, only 3 of 32 major hurricanes that formed in the Atlantic basin between 1995 and 2003 made U.S. landfall. The long-term average is that approximately 1 in 3.5 major hurricanes that form in the Atlantic basin makes U.S. landfall. This luck failed to hold beginning with the 2004 hurricane season.
It is encouraging that maybe 2009 will have a hurricane season without note. Of course, the success of the United States in avoiding a devastative hurricane landfall depends on the number of storms that form, their intensity and their track. While the U.S. might avoid storms, they could wreck havoc on our neighbors to the south. The domestic natural gas industry might welcome a hurricane this season that did selective physical damage to offshore gas producing facilities, but that would be too good to be true. Let’s hope that when the CSU professors update their 2009 forecast next, it is tamer. We deserve a year with minimal natural catastrophes after the economic trauma of the past nine months.
Energy Plays A Key Role In 7 Deadly Scenarios (Top)
We have just finished reading Andrew F. Krepinevich’s latest book, 7 Deadly Scenarios, an exploration of war in the 21st Century, published by Bantam Dell in February 2009. This book was seen in the arms of President Barack Obama on one of his recent trips to Camp David.
The book is an examination of seven possible scenarios leading to war involving the United States. Each scenario evolves from geopolitical events taken from today’s or yesterday’s newspaper’s front pages. What we found interesting is that more than half the scenarios involve energy in one way or another – although no one scenario is about an oil war.
The seven scenarios are:
The Collapse of Pakistan;
War Comes to America;
Pandemic;
Armageddon: The Assault on Israel;
China’s “Assassin’s Mace;”
Just Not-In-Time: The War on the Global Economy; and
Who Lost Iraq?
The author is a West Point graduate and 21-year military officer. He currently heads the Center for Strategic and Budgetary Assessments and has served as a consultant on military affairs for many senior government officials and members of Congress among numerous other roles. He explains the value in working through scenarios in that they help identify major trends and previously unidentified issues even if the actual details of the scenario are not correct.
Mr. Krepinevich begins the book, and his effort to explain the value of scenarios, with the attack on Pearl Harbor at dawn on the seventh day of the month. Only this attack involved flour sacks dumped on the Navy ships at anchor in the harbor and occurred on February 7, 1932, almost ten years ahead of the Japanese attack. After this exercise, the red-faced Army Air Corps argued that the damage incurred to Hickam Field was minimal; they asserted they found and attacked the carrier fleet; and finally they protested the attack on legal grounds – it was improper to begin a war on Sunday! The war game’s umpires sided with the Army – so much for a legalistic view of war.
If you want to think about the unthinkable, this is an excellent read.
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Musings From the Oil Patch
April 14, 2009
Allen Brooks
Managing Director
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