January 2016 was the first month without an IPO in over 4 years, as many companies temporarily delayed their offering due to market uncertainty, according to market intelligence firm Ipreo.
Source: CNN Money
According to MarketAxess, high-yield bonds issued by gas and oil companies grew to more than $250 billion last year, up from $95 billion in 2012. Yet with the price of oil 65% below its 2012 peak, many energy companies now find themselves in a cash-flow pinch.
Source: New York Times
U.S. consumer spending was unchanged in December, but a jump in savings to a three-year high at $753.3 billion suggested consumption could rebound in the month ahead.
Car dealers may be coming off of their biggest sales year ever, but the future for the auto industry looks murkier as the percentage of Americans with a driver’s license continues to fall.
Just 77 percent of Americans aged 16 to 44 held drivers licenses in 2014, down from 82 percent in 2008 and 92 percent in 1983. The percentage of Americans with driver’s licenses declined across every age group from 2011 to 2014,according to an analysis by Michael Sivak and Brandon Schoettle at the University of Michigan Transportation Research Institute.
Several factors have led to fewer licensed drivers, including a lack of interest among younger consumers in driving or owning a car, a general return to cities and close suburbs with reliable public transportation, a rise in telecommuting, and the advent of ride-sharing services like ZipCar and on-demand taxis like Uber. Tighter restrictions on young drivers haven’t helped either.
The introduction of driverless cars, which some industry experts say will be on roads within the next decade, promises to further reduce the share of Americans who feel the need to get a driver’s license.
The result of fewer licensed driver is that the aggregate number of miles driven has plateaued over the past decade, according to research from the Brookings Institute.
That may be bad news for automakers and the gasoline industry, but it’s good news for drivers themselves. The 2015 Urban Mobility Scorecard from the Texas A&M Transportation Institute found that drivers wasted more than 3 billion gallons of fuel and spent 7 billion extra hours sitting in traffic last year, at a cost of $160 billion, or $960 per commuter.
The crude oil market has gone crazy, and it’s taking stocks along with it.
The question now is: When will oil hit bottom?
The bad news from your “oil guy” is that once the oil market has gone “parabolic” — either up or down — picking a bottom (or a top) is a frankly useless exercise.
The only insight I can give you is a comparison to the last time oil went bat-nuts crazy, and it’s not a happy one — in 2008, when it traded over $140.
That’s right, the only real parallel I have to the current action in oil is when oil unhinged itself on the upside. In that case, just like this one, all the fundamentals in the world couldn’t explain an oil market that was pricing itself over $120 a barrel.
Sure, people talked about the seemingly endless appetite for oil coming from emerging markets, including China and India. They talked about increasing supply-chain problems that could emerge from the instability in Iraq and Iran. They even mentioned the idea of “peak oil” a lot, where we’d literally run out of fossil fuels while demand was skyrocketing.
But none of that could possibly explain a futures market price that was increasing a dollar or two a day, while official target prices in OPEC were still well under $70 a barrel.
And you could feel it then — as oil screamed past $110 a barrel in March, there was no rhyme or reason left in the market. Only momentum players, speculators and hedge funds jumped in on a market that was getting juiced. No one needed a reason — there was money to be made.
Today, there are lots of fundamental reasons being used to try to explain oil dropping below $40 a barrel: huge surpluses, an increase in OPEC production from Saudi Arabia and Iran to come, U.S. producers who are managing to hang on despite extreme negative cash flows and back-breaking debt loads.
I don’t care. This is just like 2008, but in reverse: nothing fundamental can explain an oil market now trading under $30 a barrel.
There is however, the exact same group pushing the market down today that was responsible for the move up in 2008 — the same momentum players, hedge funds and speculators who all smell a dollar to be made on a market that’s gone parabolic.
With that group in current control of oil prices, trying to pick a bottom is more than impossible — it’s meaningless. The market will stop going down when the selling stops. Period.
What I can give you, perhaps, is a time frame. In 2008, we could feel the oil markets on the floor go into “silly mode” and disconnect from reality in the early spring, as prices moved above $110 a barrel. Prices didn’t peak until early July at $145.
I believe that oil under $40 represents an equivalent disconnect from fundamental economics, even economics as bleak as the current supply glut of oil today. We breached that level in early December, and since then, I believe that oil has had all the signs of an equivalently “parabolic” market.
A bottom price? That’s impossible to guess at. But a time frame for this move? Well, if 2008 is any guide, we could have possibly another three months of very volatile moves in oil before a bottom is truly set.
Everyone will jump over each other to claim to have seen the bottom, only to see it knocked out again the next day. And if the patterns of 2008 in oil hold true, that could mean a far worse outcome for stocks. No one has to be reminded what happened to stocks in the fall of 2008.
At the very least, there’s a very scary next three months for oil — and therefore probably stocks.
Crude-oil prices plunged more than 5% on Monday to trade near $30 a barrel, making the specter of bankruptcy ever more likely for a significant chunk of the U.S. oil industry.
Three major investment banks—Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc.—now expect the price of oil to crash through the $30 threshold and into $20 territory in short order as a result of China’s slowdown, the U.S. dollar’s appreciation and the fact that drillers from Houston to Riyadh won’t quit pumping despite the oil glut.
As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research. Survival, for some, would be possible if oil rebounded to at least $50, according to analysts. The benchmark price of U.S. crude settled at $31.41 a barrel, setting a 12-year low.
More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.
Morgan Stanley issued a report this week describing an environment “worse than 1986” for energy prices and producers, referring to the last big oil bust that lasted for years. The current downturn is now deeper and longer than each of the five oil price crashes since 1970, said Martijn Rats, an analyst at the bank.
Together, North American oil-and-gas producers are losing nearly $2 billion every week at current prices, according to a forthcoming report from AlixPartners, a consulting firm, that is set to be published later this week.
“Many are going to have huge problems,” said Kim Brady, a partner and restructuring adviser at consultancy Solic Capital.
American producers are expected to cut their budgets by 51% to $89.6 billion from 2014, a reduction that exceeds the worst years of the 1980s, according to Cowen & Co. There is no relief in sight: The oil glut is expected to continue well into 2017, according to several banks, analysts and industry executives.
With little likelihood of an oil price rebound in the coming months, the companies that tap shale wells from Texas to North Dakota are splintering into the haves and have-nots.
Energy companies that took on huge debt loads to finance their slice of the U.S. drilling boom have no choice but to keep pumping to generate cash for interest payments. As they do, they are drilling themselves into a deeper hole. Companies including Sandridge Energy Inc., Energy XXI Ltd. and Halcón Resources Corp. all paid more than 40% of third-quarter revenue toward interest payments on their loans, according to S&P Capital IQ. Representatives for Sandridge and Halcón didn’t respond to requests for comment.
Greg Smith, Energy XXI’s vice president of investor relations, said the company has bought back more than $900 million in bonds to reduce interest expenses.
Some of the strongest operators with superior assets have locked in oil prices well above $50 a barrel this year through hedges, which serve as a kind of insurance policy against low prices. Even those producers with better balance sheets say they will keep pumping more. ConocoPhillips and Pioneer Natural Resources Co., two of the most successful shale operators in the U.S., plan to boost production this year.
Scott Sheffield, chief executive at Pioneer, said pulling more oil and gas out of the ground makes sense even though prices are low because the company’s most efficient wells still make good returns. Plus investors keep rewarding growth at energy companies considered to be solid.
“The ones that announced production declines into 2016, their stocks are getting hammered,” Mr. Sheffield said in an interview. Pioneer’s shares have lost about 16% in the past year, but the company successfully sold $1.4 billion worth of new stock last week in an oversubscribed equity offering.
Companies that drill themselves into a hole so deep they cannot escape will be forced to sell assets or tap revolving credit lines. That is a tricky proposition given that many energy players expect to see their borrowing bases cut as debt limits are reduced in light of the plunging value of oil-and-gas reserves in the ground.
More than $100 billion from private-equity firms is waiting in the wings to scoop up assets that are sold either before, or after, bankruptcy, experts say. But major corporate mergers and acquisitions remain unlikely, because any buyer would have to pony up voluminous amounts to cover the debts of a seller. Instead, opportunistic firms are waiting for the wave of bankruptcies to arrive. Once debt is wiped out, oil-and-gas fields will be cheap. The longer the oversupply sticks, depressing prices, the more companies will falter, leaving their assets ripe for picking at a discount.
“There’s no reason to be anybody’s savior,” said Chad Mabry, a senior energy analyst at FBR & Co. “If you can just get the assets out of bankruptcy, then you don’t have to save anyone.”
If an array of U.S. shale companies go bankrupt or assets fall into new hands and bondholders get crushed, bankruptcies will wipe the debt slate clean and lower the oil price needed to fetch a profit.
Projections for losses on energy loans continue to rise broadly, and some banks have started to raise their own forecasts for such losses. In a biannual review by a trio of banking regulators, the value of loans rated as “substandard, doubtful or loss” among oil and gas borrowers almost quintupled to $34.2 billion, or 15% of the total energy loans evaluated. That compares with $6.9 billion, or 3.6%, in 2014.
The largest U.S. banks have relatively small energy portfolios in the context of their overall lending. For instance, in the third quarter Wells Fargo & Co.’s oil-and-gas loan exposure was 2% of its total loans, roughly $17 billion, according to company filings. The bank, one of the largest energy lenders in the U.S., reports earnings Friday.
Since financial distress hasn’t been a good mechanism for slowing down U.S. oil production, many analysts fear that any pullback may come too late. U.S. government estimates pegged output at 9.2 million barrels a day at the start of 2016—1% higher than the start of last year when oil was trading for 40% more.
Written by Bradley Olson and Erin Ailworth of The Wall Street Journal
The strongest El Nino weather system in almost two decades, combined with the warmest temperatures in four years, will mean a relatively warm winter in the Midwest and on the East Coast, keeping a lid on energy prices and potentially capping stock prices for companies that produce natural gas.
This year’s El Nino, which occurs when Pacific Ocean waters are unusually warm, will be the strongest since the winter of 1997-1998, says Matt Rogers, a meteorologist at Commodity Weather Group in Bethesda, Maryland. Temperatures are expected to be the warmest, on average, since the winter of 2011-2012, he said.
While those who like outdoor activities should enjoy the warmer weather, it doesn’t bode well for companies that provide natural gas, such as Chesapeake Energy Corp. (ticker: CHK) and Cabot Oil & Gas Corp. (COG), which already are facing near-record reserves.
“There’s no question the warmer weather is going to effect the energy sector,” says Jason Wangler, a managing director at Wunderlich Securities in Houston. “It’s another leg down for the space that comes at the worst time possible.”
During the summer, companies such as Chesapeake and Cabot do what they do best – produce natural gas. In early November, when winter usually arrives, they tend to switch from putting product into storage to taking it out.
Without the usual cold weather, however, none is taken out and reserves continue to build, cutting into prices.
“We’re close to full, so now we’re waiting for winter to arrive,” says Robert Morris, managing director of oil and gas exploration and production equity research at Citi Research in New York. “The problem is, we haven’t had any winter yet. With these weather forecasts really warm, there’s no demand.”
Natural gas stockpiles rose to 3.93 trillion cubic feet in the week that ended on Oct. 30, tying a record set in 2012, according to data from the Energy Information Administration.
That’s pushed prices below $2, only the third time in 13 years that’s happened, says Phil Flynn, a senior market analyst at Price Futures Group in Chicago.
Cabot Oil & Gas, an independent company that explores and develops oil and gas properties in the U.S., says it will reduce its capital expenditures to $850 million as it attempts to improve operating efficiencies. The company also says it plans to reduce rig count at one of its sites by the end of the year.
Growth in 2016 likely will be from 2 percent to 10 percent, depending on whether natural gas prices remain low or begin to rise. Even with low prices, the company said it plans to accelerate production growth in 2017.
Investment banking firm Howard Weil lowered its target for COG stock from $33 to $31.
Chesapeake Energy earlier this month lowered its capital guidance by 14 percent to $3.4 billion, saying lower natural gas and oil prices present “many challenges” for the energy industry. About 70 percent of the company’s revenue comes from natural gas.
The company lost $83 million in the third quarter, or 5 cents per diluted share, versus net income of $251 million, or 38 cents a share, in the same quarter a year earlier. Revenue dropped by almost half to $2.89 billion.
Chesapeake’s other issue is the company is heavily leveraged, so each 10-cent move in natural gas prices has about a 5 percent effect on the company’s bottom line, Morris says. That’s about three times the industry average of 1.5 percent, he says.
It’s not all bad news for the company, however. Despite the headwinds it faces, Wangler rates CHK stock as a “buy” because it says Chesapeake is better positioned than many of its counterparts to survive the downturn in energy prices. “The main thing is survival,” he says. “It’s getting through the downturn and emerging with the ability to take advantage of the upturn. Chesapeake has enough assets and cash flow to where they can get to the other side. A lot of the other companies don’t have that ability.”
Range Resources Corp. (RRC), another company whose bottom line ebbs and flows with natural gas prices, also has some upside potential after it unloaded its Nora assets in Virginia – about 3,500 operated wells on 460,000 acres – for $876 million on Nov. 4. That caused stock prices to jump nearly 10 percent the day the sale was announced.
The sale will reduce debt by 24 percent and reduce operating expenses, Range says. Morris said Citi upgraded RRC stock to a “buy” after it recently fell to a 52-week low, and the asset sale will only help the company’s bottom line.
Still, it’s not just low natural gas prices that are threatening to hurt companies further – most can weather the storm when one commodity plunges. This year, however, energy prices across the board are low, blocking alternate sources of revenue, Flynn says.
U.S. crude oil, called West Texas Intermediate, in August fell to the lowest price in more than six years and is down 43 percent in the past year. Propane prices have fallen to the lowest in a decade.
That leaves companies, including Chesapeake and Cabot, with no safe haven should forecasters’ prognostications come true and the U.S. winter truly is warmer than normal, Flynn says.
“In recent years it wasn’t as bad for these companies as it is now,” he says. “Even if they’re not making money producing natural gas, they could produce oil and other liquids. Now they have lower oil prices and lower liquid prices. There’s nowhere to go and nowhere to hide for these companies.”
Written by Tony Dreibus of U.S. News & World Report
Yes, it’s entirely plausible that when Shanghai sneezes, Wall Street catches a cold. But try telling that to panicky investors and financial observers who will sadly suggest a more spot-on proverb: When Shanghai hacks up a lung, Wall Street runs for the safety of the bear cave.
Wall Street’s historic plunge – in which the Dow Jones industrial average plummeted 1,000 points Monday before “bouncing back” to a 588-point loss – appeared to subside Tuesday, as the Dow and Standard & Poor’s 500 index jumped 3.4 percent Tuesday morning. Call it an interest rate chill pill, as the People’s Bank of China cut interest rates for the fifth time in nine months, while investors held out hope that the Federal Reserve might hit the brakes on an interest rate hike.
Still, it’s far from a return to the bull market. “Investors are rightfully concerned,” says Kyle O’Dell, managing partner of O’Dell, Winkfield, Roseman & Shipp in Englewood, Colorado. “But smart investing is never rash, and it’s never reactionary.”
“It happened so fast and was so powerful that no one could’ve predicted it even a week ago,” says Jay Sukits, a clinical assistant professor of business administration at the University of Pittsburgh’s Katz Graduate School of Business. “But the worst thing you can do is panic: to sell right at the bottom the market.”
Got that? Don’t panic.
Instead, buckle down and follow the advice of these investment experts, who offer eight tips for making it through Wall Street’s current woes.
Keep in mind that China’s troubles can’t possibly derail strong economic indicators in the U.S., from improving job numbers to a robust real estate market. “The correction is a good thing for those who are now able to afford Apple (ticker: AAPL), Tesla (TSLA), Netflix (NFLX) and Amazon (AMZN),” says Todd Antonelli, managing director of Berkeley Research Group in Chicago. “We forget what goes up must come down. And this creates opportunity for all.” Apple, for example, was up almost 17 percent between Monday’s open and Tuesday’s open.
No one knows for sure whether this is a temporary correction, as markets always defy logic. Are we in a spell of irrational anxiety? Regardless, it’s crucial to build and manage a diversified growth portfolio, says Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management in Parsippany, New Jersey. “That includes asset classes and sectors of the market not perfectly correlated with U.S. large-cap stocks. This is critical in the days and months ahead.”
Many people will buy bonds, thinking it’s a safe haven. “But what if you purchase 10-year Treasury or 10-year corporate bonds, and interest rates rise?” Sukits says. “If interest rates go up – and there’s only one way to go, and that’s up – you’re going to get slaughtered.” Which leads us to …
It’s a given that Wall Street will squirm once the Fed raises interest rates. But would that be all bad? “It’s important to remember that equities generally continue to perform for several years after the first interest rate increase,” says Chris Gaffney, president of EverBank World Markets and based in St. Louis. “Regardless of when the first hike occurs, all indications are that the Fed will remain very cautious about the pace of increases.”
5. Count on oil to fuel the world engine – and China, too.
Keep an eye on oil prices, for as long as they stay low, it’s a good sign for the world’s economies. “Depressed oil prices hurt oil producers such as Russia, Saudi Arabia, Iran and Iraq, but they help nearly everyone else,” says Larry Elkin, president of Palisades Hudson Financial Group in Scarsdale, New York. “China will benefit from the decline in commodity prices. So will India and the rest of Asia, much of Latin America outside Venezuela and most of Africa. So, too, will Europe, and even the United States, for although we’ve become a leading energy producer, we’re still a net consumer of energy produced elsewhere.”
Remember what happened on April 22? Both the Dow and S&P 500 hit record highs. Remember what happened on March 9, 2009? The Dow hit a 12½-year low. And so it comes and goes. “You can’t predict when a storm is going to hit,” says Jonathan Gassman, co-founder of G&G Planning Concepts, a financial planning firm in Manhattan. “Yes, it may have an effect in the short term, but you’ve invested for the long term.” So avoid getting seasick. “It’s gut-check time. Use it wisely,” he says.
Even top-line investment pros need a vacation, and August is often when they take one. Expect investors to put on their game faces after Labor Day – just as we did during our school days, says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University’s Robert B. Willumstad School of Business. “The volatility of the markets may not end this week. But when everyone gets ‘back to school,’ analysts will decide that some companies have been oversold on fears that their industries will disappear. The countries that caused so much concern earlier in the summer will still exist. They may be growing slower or faster than anticipated – but they’ll still be here,” Driscoll says.
Don’t panic? That might not be a slam dunk, given that you’re going to hear a lot of doomsday talk in the next few months. Laugh it off. “Remember the 2001 book, ‘The Coming Collapse of China’? In recent times, a bunch of gurus wrote about the ‘coming collapse of America,’” says Mike Peng, a professor of organizations, strategy and international management at the University of Texas at Dallas. “My suggestion is not to believe in such end-of-the-world messages. America has been collapsing for several hundred years, [starting with] with the White House being burned down in 1812. And, of course, China has been collapsing for 5,000 years.”
Written by Lou Carlozo of U.S. News & World Report
As oil prices have fallen to their lowest level in 6 ½ years, gasoline prices at the pump may soon follow suit. As of August 24, the average retail price for a gallon of regular gas nationwide stood at $2.595 and 12 states have at least one gas station selling regular gasoline for under $2 a gallon. Source: MarketWatch
According to J.P. Morgan Asset Management, 6 of the 10 best days on the S&P 500 occurred within two weeks of the 10 worst days. Source: Business Insider
According to the Consumer Conference Board, the number of homes sold but that have not yet started construction rose to an annualized 192,000 in July 2015, the most since June 2007. Source: Bloomberg
Prince Turki bin Saud bin Mohammad Al Saud belongs to the family that rules Saudi Arabia. He wears a white thawb and ghutra, the traditional robe and headdress of Arab men, and he has a cavernous office hung with portraits of three Saudi royals. When I visited him in Riyadh this spring, a waiter poured tea and subordinates took notes as Turki spoke. Everything about the man seemed to suggest Western notions of a complacent functionary in a complacent, oil-rich kingdom.
But Turki doesn’t fit the stereotype, and neither does his country. Quietly, the prince is helping Saudi Arabia—the quintessential petrostate—prepare to make what could be one of the world’s biggest investments in solar power.
Near Riyadh, the government is preparing to build a commercial-scale solar-panel factory. On the Persian Gulf coast, another factory is about to begin producing large quantities of polysilicon, a material used to make solar cells. And next year, the two state-owned companies that control the energy sector—Saudi Aramco, the world’s biggest oil company, and the Saudi Electricity Company, the kingdom’s main power producer—plan to jointly break ground on about 10 solar projects around the country.
Turki heads two Saudi entities that are pushing solar hard: the King Abdulaziz City for Science and Technology, a national research-and-development agency based in Riyadh, and Taqnia, a state-owned company that has made several investments in renewable energy and is looking to make more. “We have a clear interest in solar energy,” Turki told me. “And it will soon be expanding exponentially in the kingdom.”
Such talk sounds revolutionary in Saudi Arabia, for decades a poster child for fossil-fuel waste. The government sells gasoline to consumers for about 50 cents a gallon and electricity for as little as 1 cent a kilowatt-hour, a fraction of the lowest prices in the United States. As a result, the highways buzz with Cadillacs, Lincolns, and monster SUVs; few buildings have insulation; and people keep their home air conditioners running—often at temperatures that require sweaters—even when they go on vacation.
Saudi Arabia produces much of its electricity by burning oil, a practice that most countries abandoned long ago, reasoning that they could use coal and natural gas instead and save oil for transportation, an application for which there is no mainstream alternative. Most of Saudi Arabia’s power plants are colossally inefficient, as are its air conditioners, which consumed 70 percent of the kingdom’s electricity in 2013. Although the kingdom has just 30 million people, it is the world’s sixth-largest consumer of oil.
Now, Saudi rulers say, things must change. Their motivation isn’t concern about global warming; the last thing they want is an end to the fossil-fuel era. Quite the contrary: they see investing in solar energy as a way to remain a global oil power.
The Saudis burn about a quarter of the oil they produce—and their domestic consumption has been rising at an alarming 7 percent a year, nearly three times the rate of population growth. According to a widely read December 2011 report by Chatham House, a British think tank, if this trend continues, domestic consumption could eat into Saudi oil exports by 2021 and render the kingdom a net oil importer by 2038.
That outcome would be cataclysmic for Saudi Arabia. The kingdom’s political stability has long rested on the “ruling bargain,” whereby the royal family provides citizens, who pay no personal income taxes, with extensive social services funded by oil exports. Left unchecked, domestic consumption could also limit the nation’s ability to moderate global oil prices through its swing reserve—the extra petroleum it can pump to meet spikes in global demand. If Saudi rulers want to maintain control at home and preserve their power on the world stage, they must find a way to use less oil.
Solar, they have decided, is an obvious alternative. In addition to having some of the world’s richest oil fields, Saudi Arabia also has some of the world’s most intense sunlight. (On a map showing levels of solar radiation, with the sunniest areas colored deep red, the kingdom is as blood-red as a raw steak.) Saudi Arabia also has vast expanses of open desert seemingly tailor-made for solar-panel arrays.
Solar-energy prices have fallen by about 80 percent in the past few years, due to a rapid increase in the number of Chinese factories cranking out inexpensive solar panels, more-efficient solar technology, and mounting interest by large investors in bankrolling solar projects. Three years ago, Saudi Arabia announced a goal of building, by 2032, 41 gigawatts of solar capacity, slightly more than the world leader, Germany, has today. According to one estimate, that would be enough to meet about 20 percent of the kingdom’s projected electricity needs—an aggressive target, given that solar today supplies virtually none of Saudi Arabia’s energy and, as of 2012, less than 1 percent of the world’s.
Some of Saudi Arabia’s most prominent industrial firms, as well as international electricity producers and solar companies big and small, have lined up to profit from what they see as a major new market. The fact that Saudi Arabia, an ardent booster of fossil fuels, has found compelling economic reasons to bet on solar is one of the clearest signs yet that solar, at least in some cases, has become a cost-effective source of power.
But the Saudis’ grand plan has been slow to materialize. The reasons include bureaucratic infighting; technical hurdles, notably dust storms and sandstorms that can quickly slash the amount of electricity a solar panel produces; and, most important, the petroleum subsidies that shield Saudi consumers from any real pressure to use less oil. The kingdom is a fossil-fuel supertanker, and though the captain knows that dangerous seas lie ahead, changing course is proving exceedingly hard.
Nasser Qahtani is an oilman through and through. On a credenza in his Riyadh office, he has a souvenir glass block that holds a shot of crude from Saudi Arabia’s biggest oil field. He spent about 15 years working at an Aramco petroleum-processing plant. And he has a master’s degree from Texas A&M University, which is why he has two Aggies coffee mugs on his bookshelf. “That’s for my easy days,” he told me one morning, pointing to the smaller one. “That’s for my tough days,” he deadpanned, pointing to the bigger mug.
Nasser has many tough days. Any shift away from oil threatens a host of entrenched powers, and as the vice governor of regulatory affairs for Saudi Arabia’s Electricity & Cogeneration Regulatory Authority, he spends much of his time trying to corral the competing constituencies to work together to modernize the country’s energy system.
Sipping Arabic coffee while sitting beneath paintings of the same three Saudi royals who adorned Prince Turki’s office wall, Nasser underscored the extent to which his country’s energy subsidies promote waste. In October, the World Bank estimated that Saudi Arabia spends more than 10 percent of its GDP on these subsidies. That comes to about $80 billion a year—more than a third of the kingdom’s budget. “In my opinion, that’s an accurate number,” Nasser said. “This is not sustainable.”
Also unsustainable is the opportunity cost of burning so much oil at home. Aramco sells oil to the Saudi Electricity Company for about $4 a barrel, roughly the cost of production. Even with the global price of oil down to about $60 a barrel as of this writing (a drop of about 40 percent since June 2014), Saudi Arabia forgoes some $56 on every barrel it uses at home. That gap will become far greater if, as many experts expect, the global price rebounds.
Saudi leaders carefully calibrate the kingdom’s output to keep that global price where they want it: high enough to fill Saudi coffers but low enough to avoid spurring competitive threats. For years, analysts have debated how much oil Saudi Arabia has in the ground, with some alleging that the kingdom is far less flush than it lets on. Saudi officials maintain that they face no immediate crisis, but they talk about the need to keep in check competitors such as the U.S. shale-oil industry. A serious reduction in the oil they have available for export would hinder their ability to fend off such threats.
Over roughly the past year, the government has toughened energy-efficiency requirements for air conditioners, imposed the country’s first-ever fuel-economy standards for cars, and begun to require insulation in new buildings. It’s moving to require that new power plants be more efficient than the ones they replace. And in March, Saudi Arabia signed a memorandum of understanding with South Korea to build the kingdom’s first two nuclear reactors, and possibly more.
What Saudi leaders don’t appear likely to do, at least anytime soon, is cut the fossil-fuel subsidies. Many Saudis view cheap energy as a birthright, and any increase in prices would be hugely unpopular. In a speech in February, the head of the central bank called for slowly reforming the subsidies, but he gave no indication of when. In the meantime, officials are looking to what once seemed an unthinkable solution: promoting renewable energy.
“The view initially was not to support renewables,” Nasser told me, explaining that Saudi officials feared “that if renewables were successful, we would not find customers for our commodity.” That view has changed—sort of. Should solar somehow begin to threaten the primary market for Saudi oil—as a transportation fuel—the kingdom’s calculus could shift back.
Few places better illustrate Saudi Arabia’s energy challenge than the country’s Red Sea coast. Along a stretch of black highway running north from the coastal city of Jeddah lies a string of new infrastructure. All of it is big. All of it is named for King Abdullah bin Abdulaziz al Saud, who died in January after leading the country for a decade. And much of it was built by Aramco, which, beyond being an international oil giant, is the Saudi government’s go-to player for getting things done. There’s the new King Abdullah Football Stadium, the new King Abdullah University of Science and Technology, the new King Abdullah Economic City, and the new King Abdullah Port. To the north of all this development, in the village of Rabigh, sits an enabler of growth: a massive, oil-fueled power plant.
Built by a Chinese firm and completed in 2012, the plant consists of two towering furnaces that produce electricity by burning heavy fuel oil. When I visited one morning this spring, a tanker sat at the pier, disgorging its liquid into one of the plant’s six circular storage tanks. Each tank holds about 14.5 million gallons of oil, which the plant typically burns in a week. In the sweltering air, the place stank like a Jiffy Lube, the kind of smell that sinks into your pores. Luai Al-Shalabi, a worker who lives in a dormitory there, told me the oily odor is ever-present: “All the time I feel it.”
Oil isn’t the only liquid this plant requires. It also needs freshwater—more than half a million gallons a day. The plant’s furnaces burn the oil, the heat boils the water, and the steam spins the plant’s turbines. All of that freshwater isn’t readily available in this desert kingdom; the Saudis have to make much of it out of saltwater.
Next to the power plant is a desalination plant. It’s small by Saudi standards; far bigger ones produce drinking water. Yet it still seems huge: a maze of tanks, tubes, filters, and pumps covering an area twice as large as a football field. The water the plant sucks in from the Red Sea contains about 40,000 parts per million of salt. By the time it comes out the other end, having been filtered and mixed with chemicals, its salt content is 25 parts per million. The process is a triumph of man over nature. And every step consumes electricity—which comes primarily from oil.
Solar power presents an alluring alternative. The kingdom first began experimenting with energy from the sun in the 1970s. In 1979, the same year that unrest in the Middle East sparked a global oil shock and President Jimmy Carter had solar panels installed on the White House roof, the United States and Saudi Arabia jointly launched a solar-research station about 30 miles northwest of Riyadh, in a tiny village called Al-Uyaynah, which at the time lacked electricity.
Work at this site languished in the 1990s and early 2000s but has picked up in the past few years. In 2010, the King Abdulaziz City for Science and Technology, the research agency that runs the station, built a small experimental assembly line there to manufacture solar panels. A year later, it more than quadrupled the line’s capacity. It plans to expand the facility again over the next several months, this time by a factor of eight.
Prince Turki told me that Saudi officials want to add another factory elsewhere in the kingdom; it will be one of the largest outside of China. The goal, he said, is not just to install solar panels across Saudi Arabia but to export them—a way, Saudi officials hope, to create high-paying tech jobs for the kingdom’s large population of young people. (Some two-thirds of Saudis are younger than 30.) Officials also want to bankroll solar installations in other countries, to boost the market for Saudi-made panels. Among the potential locations is the United States, where Turki envisions the kingdom undercutting other solar providers in part by tapping cheap development loans from Saudi banks.
But the factory at Al-Uyaynah shows how far the country has to go. The equipment comes mostly from Europe, and the solar cells—the square slices of silicon that make up a solar panel—are made in Taiwan. Often, as on the day I visited, the assembly line doesn’t produce much, because materials are stuck in transit. Once, a shipment of the plastic sheeting used to seal the backs of solar panels sat at a Saudi port for a month, and it melted.
The disconnect between aspiration and reality is even starker at the King Abdullah University of Science and Technology, one of the big projects along the Red Sea coast. The multibillion-dollar campus has both a world-class solar-research lab and some stupendously energy-inefficient amenities—including, in the middle of the desert, a hotel where I found my room chilled to about 62 degrees Fahrenheit and a nine-hole golf course fully lit for nighttime play.
The entire campus went up in about three years. It has a town square with a Quiznos sandwich shop, a Burger King, and a grocery store with an extensive selection of dates and nonalcoholic beer, all across the street from a towering white mosque. It has steel-and-wood offices and houses with red-tile roofs, both of which evoke suburban California. And it has a faculty of experts recruited from around the world.
Among them is Marc Vermeersch, a Belgian physicist and materials scientist who arrived in January after spending several years in Paris heading up solar work at Total, the French oil giant. Vermeersch told me that although no expense was spared in setting up the university’s solar laboratory, the money wasn’t wisely spent. The lab includes half a dozen highly specialized printers—including one that cost about $1 million—that apply coatings to surfaces, a process important in researching futuristic solar-panel technologies. But because Saudi Arabia wants to ramp up solar power soon, Vermeersch and his colleagues are reconfiguring the lab to focus on nearer-term research, work he hopes will pay off in the next few years.
The university houses an incubator for technology start-ups, including a firm founded on the premise that there’s good money to be made in keeping solar panels clean in the desert. The company’s creator is Georg Eitelhuber, an Australian-born mechanical engineer who came to the university in 2009, the year it opened, to teach physics at a high school on the campus. “King Abdullah made me an offer I couldn’t refuse,” Eitelhuber told me kiddingly, in an Aussie accent.
In late 2010, Eitelhuber attended a ceremony at the university for which “a bunch of bigwig managers” gathered to christen experimental solar panels. But a dust storm had blown in, covering the panels and threatening to nix the photo op. With the temperature hovering at about 115 degrees and “everyone sweating bullets,” he said, “guys with squeegees” swept in to wash down the panels. Incredulous, Eitelhuber asked how solar panels are normally cleaned. “This is it,” he was told. “It was clear to me this was going to be the big new problem of a new industry in the Middle East.”
With seed funding from the university, he and some colleagues set about designing a waterless system. “The idea of using desalinated water that’s desalinated using oil,” he said, “is just a big green wash.” Five years later, his company has a late-stage prototype—a long metal rod with lines of brush bristles, powered by the panels—and several solar-panel manufacturers are testing the device. Eitelhuber plans to start installing it on solar farms next year.
Aramco is the most important player in the kingdom’s shift to solar power. The company’s initial forays have been tiny—a solar-panel array next to one of its office buildings, for example—but its plan to break ground on 10 or so bigger solar projects next year seems to represent the start of a more serious commitment. A high-ranking Saudi official told me he expects Saudi Arabia to develop an initial tranche of a few gigawatts of solar capacity over the next five years. The projects will be in places where the cost of conventional fuel is high, either because the sites are remote or because they use diesel. (Saudi Arabia has historically had to buy large quantities of diesel at international prices because its refineries can’t process enough to satisfy domestic demand.)
Even at these cherry-picked sites, solar power is likely to cost more than electricity from the existing conventional plants—but only because those conventional plants get oil at a subsidized price. This explains why the government, not the private sector, is making most of the investment in solar. Private companies are waiting for the government to offer up a slate of contracts that would, in effect, allow solar energy to compete with artificially cheap oil-fired electricity.
One of the biggest firms waiting in the wings is AcwaPower International, which is based in Riyadh and owns and operates power and desalination plants in the Middle East, Africa, and Southeast Asia. In the past few years, Acwa Power has signed contracts to produce solar power in several countries—places where the price of conventional electricity is higher than in Saudi Arabia.
Earlier this year, it won a bid to build a solar farm in Dubai. The price at which Acwa Power agreed to sell electricity from that solar farm—5.84 cents a kilowatt-hour—turned heads among solar watchers the world over. It was heralded as signaling a new era of cost competitiveness. Paddy Padmanathan, Acwa Power’s president and CEO, told me he’s confident the company will make a healthy profit over the 25 years of the deal. “All of a sudden, renewables are becoming a very competitive proposition,” he said.
Acwa Power hasn’t yet developed any solar projects in Saudi Arabia. But Prince Turki told me that Taqnia, the state-owned company he chairs, is finalizing a deal to provide solar energy to the Saudi Electricity Company for 5 cents a kilowatt-hour—even less than the price Acwa Power recently agreed to in Dubai. “It’s the cheapest in the world that I know of,” Turki said.
That deal may be a tantalizing sign of things to come, but the goal Saudi Arabia announced three years ago of building 41 gigawatts of solar capacity remains a distant glimmer. In January, Saudi officials announced that they were pushing back the target date from 2032 to 2040—and even with the longer time frame, skeptics have dismissed the goal as a mirage.
Proving them wrong would require reshuffling an economic deck that the kingdom’s leaders have stacked for decades to favor petroleum. In that sense, Saudi Arabia’s energy challenge is a more extreme version of the one that faces the rest of the world. But if the kingdom’s leaders can find the political courage to act decisively, Saudi Arabia, of all nations, could become a model for other countries trying to shift away from oil.
For the most part, consumers are accustomed to seeing prices for a wide range of goods go in only one direction: up, up, and up. Often, this is simply the result of inflation and regular price increases. There are also freak price spikes like the current situation with eggs, which have risen dramatically of late thanks to the bird flu outbreak. And more costly eggs have in turn begun causing price increases everywhere from diners to bakeries.
Drill, baby, drill? More like refine, baby, refine.
As the shale oil boom faces its first slowdown, America’s refiners are running harder than ever to keep up with drivers. Refineries in the U.S. used 16.8 million barrels of oil a day last week, the most in government data going back to 1982. They are burning through stockpiles of crude that earlier this year were the highest since 1930 to provide gasoline to motorists who are driving at a record pace.
The profit for turning crude into gasoline and diesel along the Gulf Coast, where about half of U.S. refineries are located, is the highest for this time of year in at least a decade, according to data compiled by Bloomberg.
The four members of the S&P 500’s refining index have returned an average of 24.5 percent to shareholders this year. By contrast, the 41 companies in the S&P’s main energy index have combined for a 7.5 percent loss.
Who’s rooting for the refiners even more than their shareholders? That would be U.S. oil producers. The only shot they have of seeing crude prices rebound after dropping by half from last year is for refiners to burn it down to reasonable inventory levels.