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The Black Heart of Energy Demand

My previous article on the relative strength of BP versus the falling market was an excellent example of bad timing.  Little did I know that the company would give up on the “top kill” method and instead rely on a possibly successful relief well which is supposed to be completed by August.  I know that BP has done the cost/benefit analysis of the current work being done, but it seems that they could have done a much better job of managing public relations.  Their balance sheet and financial strength can swallow a lot of payments, but not the legal repercussions of poorly managed PR.  Unfortunately, perception is nearly everything and the image of effort by BP would go a long way towards loss mitigation.

I am not going to battle for BP, far from it.  It is an ugly disaster with lasting consequences.  On the other hand, I do not believe that this catastrophe will have long-term effects on oil demand or companies not directly culpable for the spill.

As we saw from the excellent video on the size of the national debt, we are all very terrible at understanding very large numbers.  Try to keep this in mind when going through current demand figures.

Daily global demand for oil is 85 Million barrels per day.  There are 42 gallons in a barrel so that equates to 3.57 Billion gallons per day or 3,570 million gallons per day.  Think of the gallon of milk in your fridge or your 20 gallon gas tank.  To get the number up to scale, think about an olympic sized swimming pool filled with 660,000 gallons of water.  Now imagine 5,400 olympic sized pools being drained every day.  You get the idea.

What about the BP Deepwater Horizon from a historical spill perspective?

Not at the Top of the List but certainly rising rapidly

What is more frightening is when we frame these specific oil spills against average oil spills from all sources.  It is estimated that 706M gallons of waste oil are spilled into the ocean every year and only 51.5M of those gallons come from off shore drillng or tanker accidents.  Graphically:

Average annual spills dwarf the large individual spills

There are a few things to draw from this information.  The first is that only large singular and transparent events draw the backlash and disgust from the public.  Deaths by 1,000 cuts seem to be tolerated.  The second important fact is that we, as a globe, love oil.  Alternative sources of energy are abundant, but they are all still more expensive than crude oil.  Until the cost of the alternative energy sources comes close to that of oil, we will be willing to tolerate the repercussions of oil spills while blaming the true evil culprits (BP, Transocean, Halliburton, Anadarko, Cameron International, and our government).

Hopefully this spill will be stopped before the relief well comes online, but until then I will be looking for opportunities in the energy sector.  Demand will continue to grow and prices will continue to rise.  Oil is also a naturally good hedge against a depreciating dollar and the current pullback in oil prices provides a decent entry point into the commodity itself.  Look to the ETF’s  XES, XLE, and USO for opportunities.

Let us also try to learn from unintended consequences – Many people are protesting BP by not  going to BP gas stations.  This hurts the small owners of those local filling stations more than BP itself.  BP can always sell its gasoline and oil to other vendors as gasoline is a very fungible commodity.

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