Five Energy Predictions for 2013

Normally when I list the Top 10 stories of the year, I close the post by making predictions for the upcoming year. For 2012, my predictions were:

  1. President Obama will easily win reelection, which means that energy policies will likely continue along the current trajectory.
  2. The Keystone Pipeline project will be approved (although that decision may still slide into 2013).
  3. Natural gas prices will remain low, averaging below $5/MMBTU for the year.
  4. Oil prices — both West Texas Intermediate and Brent — will average above $100/barrel in 2012.
  5. We will look back on the fact that Newt Gingrich was once the leading Republican contender for president and have a good laugh about it.

Those predictions were correct for the most part. The first and third were correct, I believe the second will ultimately be correct, the fourth was mixed (Brent averaged above $100 and WTI averaged about $94), and the 5th just depends on one’s personal opinion. In my opinion, it is correct.

However, when I listed the Top 10 Energy Stories of 2012 — as voted upon by readers — I failed to list my predictions for 2013. So here they are:

  1. Brent and WTI crude prices will both average less in 2013 than in 2012.
  2. The Brent-WTI price differential — which has widened substantially in the past two years — will narrow in 2013.
  3. The average annual price of natural gas — as measured by the Henry Hub Gulf Coast Natural Gas Spot Price — will be higher than in 2012.
  4. The Obama Administration will approve the northern leg of the Keystone XL pipeline.
  5. US oil production will continue to grow (but at a slower pace than in 2012), reaching the highest level since 1995.

The reason I believe Brent and WTI prices will fall is that I believe global oil supply is currently expanding faster than global demand is growing, and this is building up spare capacity. The oil industry is cyclical, and during this part of the cycle, increasing spare capacity leads to falling prices. I believe that we will reach a point at which spare capacity can no longer be built faster than demand increases — either because global production is in decline or demand in developing countries is simply too great — but I do not believe we have yet reached that point.

The Brent-WTI differential developed because US oil production has expanded faster in recent years than the oil could be transported to the global market. The result was a supply glut in the middle part of the US, and WTI prices falling relative to Brent prices. Substantial new pipeline capacity will come online this year to relieve some of the glut, and should narrow the differential.

I believe natural gas prices will increase because a huge number of rigs have been shifted from natural gas production to oil production. Major operators have been shutting in production. In the last half of 2012, gas prices bounced off of their lows and began to rise. I believe they will continue to do so in 2013.

In 2011, the Obama Administration had strongly signaled support for the Keystone XL pipeline expansion that would would have the capacity to carry 830,000 bpd of crude from the oil sands in Alberta and the Bakken oil fields in North Dakota. But environmentalists protested the pipeline, and since Obama was running for reelection and feared alienating his base, he punted the decision until after the election. But the US State Department issued a final Environmental Impact Statement (EIS) in late August 2011 that came down in favor of the project. Now that Obama has won a second term, I expect the project will be approved. A decision one way or another is expected this quarter.

Finally, US oil production expanded sharply in 2012. It will be hard to repeat that level of expansion in 2013, especially if oil prices soften. But I expect that the revolution of oil production in the US still has a few years to go before production begins to decline.