The Obama administration just released its inaugural Quadrennial Energy Review (QER).
The aim of the 348-page report, which was ordered by a Presidential Memorandum in January 2014, is to help the U.S. government create a "comprehensive and integrated energy strategy" by identifying the roadblocks to providing affordable and secure energy and energy services for the country.
The QER's concerns mirror those I have considered in Oil Energy Investor and even addressed before the queen's Windsor Energy Consultation last month at Windsor Castle outside London.
And as the severity of the problems outlined in the QER become apparent, there are going to be some very nice opportunities for investors to profit.
However, the report neglected to address a number of key issues that are crucial to understanding the challenges in the energy sector.
Here's my take on what really needs to be fixed…
There Are Three Looming Crisis Points
The QER, which will see a regular release, will have its own multi-departmental and agency task force charged with making policy recommendations. The government's intention here is to meet a need I have demanded we fill for some time: the development of a genuine national energy plan.
Highlighted in the government's treatment are detailed indications of a crisis fast approaching in three areas:
- A huge replacement need for broad areas of energy delivery systems inside the U.S.
- A rising situation threatening the nation's ability to transmit, store, and distribute energy (TSD).
- Some pretty serious security considerations weighing on the integrity of the overall TSD system.
But there are many very important factors the report does not consider. Of this rather long list, there are four I would emphasize here at what I hope is the first stage of a long and serious process.
The Report Doesn't Look at the Global Situation
First, nothing outside the U.S. is considered. Such is to be expected; this is, after all, a domestic policy report. But given the integrated nature of the global energy system, what is occurring elsewhere will have a decisive impact on what is done within America's borders.
The global crisis is far worse and dovetails into some of our most pressing security and terrorism concerns. At current projections, a widening percentage of the world's population will be cut off from any access to energy, literally living in the dark…
…And easy prey for whatever radical movement comes by.
As I discussed in my Windsor briefing, there will be a huge global price tag to avoid international infrastructure collapse.
My estimate of essential requirements to avoid a "World Collapse Scenario" is $2-$5 trillion by 2035 in targeted areas. Currently, there is a 40% shortfall; investment is down despite long-term funding supply expanding.
The International Energy Agency (IEA) Projected Need stands at $48 trillion (in the agency's New Policies Scenario – $40 trillion for energy supply, $8 trillion for improved efficiency). The need increases to $53 trillion with the so-called "450 Scenario," which seeks to limit the global increase in temperature to 2 degrees Celsius.
Energy Supply Will Require a Huge Commitment
At current projections, we are moving toward merely buying a Band-Aid to patch over the troubles in the existing global energy network with approaches tied to national and corporate debt limitations. Put simply, most of the world will be unable to cope without massive population and lifestyle disruptions.
This is the slide I used at Windsor to break down what the IEA regards as required through 2035:
Rising energy demand is progressively moving away from the developed industrial nations to the developing world, as another of my presentation slides graphically indicated (once again using the IEA's New Policies Scenario):
However, the most significant conclusion is this: Less than 50% of the infrastructure needs are to meet increasing demand. Most are to offset declining energy production. As we move forward, it is energy supply that will require the greatest commitment. For example, I estimate that as much as 80% of future capital needs in oil and gas will be upstream – that is, at the production or generation point – not in the TSD addressed by the QER.
How to Avoid Going over the Cliff
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.