The September 11th Effect on the Global and Domestic Energy Industry
Karim Khan
The tragic events of September 11, 2001 have the potential to change the world’s geopolitical framework, the ways that people live and conduct business, and the assumptions on which we operate, according to more than a half-dozen client reports issued by Cambridge Energy Research Associates (CERA). As the economy reacts and the U.S. wrestles with how to respond to the attacks and protect its citizens, the possibility exists for a significant shift from globalization and economic integration toward an emphasis on domestic security and, in practical terms, a slowing or even reversal of trade liberalization. The reports by CERA suggest a number of effects on the world and North American energy markets:
Crude Oil. Downward revisions in the outlook for oil demand, based on the effect of September 11 on economic performance and jet fuel demand, point to the potential for oversupply in 2002, unless OPEC acts to curtail production. CERA is projecting a small global stock build in the fourth quarter of 2001, and, assuming further cuts in OPEC supply early in 2002, a significant stock build in the first half of 2002. For the fourth quarter of 2001, CERA is projecting an average of around $24 per barrel.
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Refined Products. In response to a downward revision of expected economic growth for the global economy, CERA is projecting total world oil demand will grow just 0.3 millions of barrels per day (mbd) in 2001 compared with last year’s total. For the fourth quarter, CERA also expects total world jet fuel demand to decline 0.5 mbd below the fourth quarter 2000 level. For 2002, CERA expects continued weak economic growth to lead to an increase in total world oil demand of only 0.3 mbd. The weak demand picture points to depressed refining margins for the downstream industry, although one mitigating factor is that global refined product inventories are low.
North American Natural Gas. Price weakness, growth in domestic and imported gas supply, and a strong storage position combined with the potential weakness in the U.S. economy are likely to dampen U.S. natural gas demand even further.
North American Electric Power. The outlook for the North American power business reveals slackening demand, lower prices, and increased operating costs into 2002.
Energy Security Concerns
Energy exploration and production (E&P) companies are likely to undergo changes related to security and economic stability. Some of the changes may include continued investment in existing long-term projects. CERA expects that ongoing investment programs in deepwater, heavy oil, and in other areas perceived as politically stable will continue apace. However, a slowing global economy, exacerbated by widening economic repercussions from the September 11 attacks, will make production growth targets difficult to reach, especially for companies pressed to meet the increases announced previously under more favorable circumstances.
In North America, electric power companies face new security challenges, such as the security and reliability of energy sources. A shift is likely from thinking of energy security in terms of U.S. reliance on foreign sources of oil to also include a focus on U.S. domestic infrastructure. This will alter, and potentially even forestall the debate over electric industry deregulation and restructuring.
Infrastructure security will be questioned as well; we can expect heightened security around key generation, transmission and distribution facilities. These extra security measures will translate into higher electricity costs. System planners will now want to ensure the security of electric transmission systems—both physical assets and information systems used by grid operators—by putting double and even triple contingencies in place.
