Christof Rühl, BP’s group chief economist, recently presented BP’s Statistical Review of the World Energy.

BP has been producing this report since 1951, when the company was trying to get a handle internally about who was using oil and where. Today, this report is published publicly and also covers the use of renewable energies.

In the report are some interesting facts:

·         China now consumes more energy than the U.S.;

·         China leads Asia in gas consumption;

·         Renewable energies represented 1.8 percent of the world's primary energy in 2010.

However, these general trends were always placed in the context of economic outlooks, and the reality is the energy is needed for economic growth. And, from a pure energy standpoint, we have economic growth. Regardless of the economists’ discussions, the world is growing economically and it is reflected in the demand for energy.

However, in the discussion of the oil and gas markets, Rühl has some interesting observations that sound familiar to me from the discussion of computer chip markets. Like silicon, the general trend is up but the market often gets ahead of itself.

Here is what Rühl said in his speech. 

“On first sight, energy consumption mirrored the economic cycle: It fell and it rose with the economy. In fact, it overshot – twice. Energy demand fell by more than GDP in 2009 (when it saw its first decline in almost on 30 years) and it rose by more than GDP in 2010 (when it saw its strongest increase for nearly 40 years). A look at historical data confirms that this should not come as a surprise: As a rule, the amplitude of fluctuations in energy consumption over the business cycle exceeds that of GDP.”

Like silicon production, answering demand has a boom and bust impact that is most easily observed in the refineries. Having watched Wall Street speculate on oil and gas markets, we can observe the fluctuations with some anomalies.

He continues:

‘With consumption growth so far outpacing production, one would expect a large decline in inventories during 2010. But in fact, OECD commercial inventories fell only by a very modest 30,000 b/d over the year – not nearly as much as implied by the large gap between consumption and production. The explanation lies in floating storage: In 2009, when the oil market was well-supplied, large volumes were stored at sea and therefore did not enter official OECD inventory statistics. As the market tightened in 2010, floating storage was withdrawn first, because it is more expensive. In other words, the relatively modest movement of inventories onshore masked a much larger overall inventory correction over the course of 2010.”

However, now with newer economies growing like China’s, the refineries are not optimized for delivering to these locations. Logistics and local development may further mask the demand. Additionally the refineries are the place where demand for transportation gets met with middle distillates.

The report gave me further insight into my buy side perspective. Ultimately, the value of managing the smart grid comes down to cross elastics of refining energy. Presently that demand is observable but not efficiently. For alternative fuels to effectively impact businesses, scale and communication are going to have to be delivered so effectively that they are going to have to be traded against Sweet Crude as a basis. However, it’s not the oil that is a trade off but the refining. And renewables’ entire process is embedded in the unit of measure as opposed to oil.

Delivering a pure unit of energy commodity that can be communicated directly to the markets would be an economic boost and a way to track economics overall.

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