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HOUSTON — The advantage of having access to cheaper energy supplies is benefiting the U.S. economy to the tune of close to $1 billion a day, or roughly $350 billion a year, according to Francisco Blanch, Global Head of Commodities Research for Merrill Lynch.
Speaking at the Oil Council North America’s meeting in Houston on Oct. 9, Blanch calibrated an energy advantage — equivalent to 2.2% growth in gross domestic product — for the U.S. relative to Europe. With GDP in the U.S. growing at approximately 1.5% versus a negative rate in Europe of -0.5% to -1%, the net difference between the U.S. and Europe produces the 2.2% growth, he says.
Blanch described energy as “the main constraint on global GDP growth.” In the U.S., however, he noted that the oil supply/demand balance improved year over year by about 1 million barrels a day (bbl/d), as production grew by 750,000 bbl/d and consumption fell by 250,000 bbl/d. Blanch put the value of lower natural gas prices — “a tremendous benefit to the U.S. economy” — at $650 million a day.
“The amount of wealth and the support to the U.S. economy that the energy sector is providing is becoming a big eye-opener for countries all around the world,” said Blanch. Noting that the U.S. was expected to be a large liquefied natural gas importer six or seven years ago, “I just can’t imagine how this economy would be surviving at $18 to $20 per million Btu gas, which is what Japan and Korea are facing right now,” he continued.
Co-panelist Jan Stuart, head of Global Energy Research at Credit Suisse, was not expecting the U.S. to provide much near-term relief for Asian gas markets, with exports unlikely to grow to be much over 3- to 6-billion cubic feet per day, and the planned Kitimat export terminal in Canada viewed as “an end-of-the-decade story.” Asian gas markets would remain largely oil-linked, he said, and would depend to a greater extent on the pace of developments in eastern Australia and eastern Africa. In particular, Japan’s government and utility buyers would tend to maintain oil-linked pricing for security-of-supply reasons.
Blanch agreed that Japanese and Korean markets would remain oil-linked, given their lack of natural resources, but suggested the very large shale-gas potential in China would allow it to avoid paying the premium prices elsewhere in Asia. Currently, China’s natural gas price is around $6 per MMBtu — higher than in the U.S. but not by enough to markedly spur development of its domestic resources. Blanch predicted the Chinese gas price would over time rise to $9 to $10, but its domestic supply base would obviate it having to pay prices of $14 to $17.
On oil, Stuart said forecasts of rapid growth in U.S oil — including his own forecast of 10 million bbl/d by 2018-2019 — did not necessarily translate into bearishness on price. “We think it takes $95 Brent for the U.S. oil industry to self-fund the expansion that is currently under way to drive production up by something like 750,000 bbl/d per annum.” He recalled “the kind of panic that broke out in boardrooms” when earlier in the year West Texas Intermediate fell below $80 per barrel. Since then, he noted, the domestic rig count had largely flat-lined.
Below $95 Brent, “We simply are not going to get the growth,” he observed, “and I don’t think the industry can rely on foreign investors to supply the money willy-nilly like it has been doing in gas plays or the bigger oil plays.”
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