DeGroote MarketWatch

DeGroote Marketwatch is a student-generated weekly report on the financial markets.

Trader in Residence has concluded for the semester.

Week of November 13, 2017

American markets ended the week flat to modestly lower, after steep drops in the market midweek. The S&P 500 dropped 0.7% early in the week, with the Dow following suit, falling 0.9%. Declining oil prices caused energy stocks to lead the major market decline into the midweek. The heavily weighted General Electric (GE) announced Monday morning it would be halving its dividend; a move that caused investors to quickly lose confidence in the company. GE stock fell 7.2% on Monday, and continued to decline an additional 5.7% on Tuesday – supporting the drop in U.S. markets. The tech heavy NASDAQ was unaffected by market conditions, and hit another record high this week – breaching above 6,800 for the first time in history. Positive economic data changed investor sentiment on Thursday, causing markets to rally as optimism returned. Retails sales increased in October by 0.2%, with housing starts having an unexpected increase of 12.7%. A marginal increase in inflation of 0.1%, has led to speculation that further increases in interest rates are unlikely in the near future. House Republicans passed a new tax reform plan Thursday, which was similar to their last bill to lower corporate ...

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The Future of Primary Energy may not be Very Different from Today

By: Davoud (David) Ghasimi, CFA

This week I was reading the summary of the World Energy Outlook 2017 published by the International Energy Agency (IEA) and a similar report from the US Energy Information Administration (EIA) published in September. My initial perception was that everything is changing and the renewable energy is going to be a big part of the market. However, after digging into the numbers and some back-of-the-envelope calculations, I surprisingly found that the big picture is not very different from today, at least for the primary energies. Let’s see what the numbers say, but before that we need a few definitions.

Primary vs. Secondary Energy

Primary energy refers to the energy commodities that are “extracted or captured directly from natural resources”, according to the IEA’s statistics manual. Examples of the primary energy are crude oil and natural gas. Even the electricity generated directly from natural resources is called primary energy. For example, hydro-electricity or the electricity from a solar panel are both examples of primary energy.

Secondary energy, on the other hand, is an umbrella term that includes all forms of energy that are produced from the primary energy. Examples include petroleum products that are produced by refining the crude oil. Thermal electricity is another example. When we use the heat from the nuclear energy or the natural gas to generate electricity we are basically moving from the primary towards the secondary source of energy.

Renewables vs. Non-renewable Energy

Any primary or secondary energy can be either renewable or non-renewable. Non-renewables, better known as “fossil fuels”, are usually easy to identify. They are formed from biomass after the passage of thousands of years. Renewables, on the other hand, are generated from the “current or recent flows of constantly available solar or gravitational energy”, as the IEA defines. The Natural Resources Canada names the followings as renewable energies:

  • Hydro-electricity
  • Bio energy (biomass, biofuels)
  • Wind power
  • Solar energy
  • Geothermal energy
  • Ocean energy

Final Consumption

The final consumption of energy is another important term. The idea is that the total energy we actually consume in the form of final products is less than the total energy we produce. The reason is that a significant portion of energy is either used to produce secondary energies or being lost during transportation. The final energy consumption is somewhere around 70% of total primary energy.

Global Units of Energy

Energy comes from different sources and for each source we may have different units of measurement, especially at production level. For example, barrels per day (bbl/d) for oil, kilowatt per hour (KWh) for electricity, and million cubic feet (mcf) for natural gas. But when we talk about the world’s energy supply or consumption, we need to use a single unit in order to aggregate all supplies and put everything on the same scale. There are at least three commonly used units in energy publications:

  • Tera Watt per hour (TWh)
  • Million tonnes of oil equivalent (Mtoe)
  • Quadrillion Btu

Another point is that conversions from different sources is never perfect since the quality of energy commodities change over time or from one place to another. These simple conversion factors may also be useful:

  • 1000 Mtoe is approximately 11,630 TWh.
  • 1 quadrillion Btu is approximately 25.2 Mtoe or 293 TWh

Energy Market: from 2016 to 2040

Now it is easier to look at the numbers. The world’s total energy consumption in 2015 was 575 quadrillion Btu and is expected to grow by 28% to 736 quadrillion Btu by 2040, based on the EIA’s September report. The EIA’s figure includes primary sources as well as “petroleum and other liquids”, and “consumption” here is not the final consumption.

The renewable energy is said to grow faster than any other sources from 2015 to 2040. However, there are two points. First, renewables are still a small part of the market, accounting for around 13% of all sources. Second, every other source of energy is expected to grow except the coal. In other words, non-renewables like oil and natural gas are also growing. As a result, while renewables are estimated to grow by around 75% from 2015 to 2040, the share of renewables will grow from 13% to around 18% only. And a significant portion of these renewables comes from hydro-electricity and not solar or wind or other sources.

A bigger change is probably related to electricity. Its share in transportation is likely to double but transportation would still account for 4% of total electricity delivered in 2040. Also, renewables (particularly solar and wind power) and natural gas are expected to provide much of the growth for electricity.

These trends and numbers can probably explain why big energy companies are still working on oil and gas projects and why renewables are still a very small part of their business. They also explain why a company like BP “is focusing on smaller investments in renewable energy” as Reuters reported in October referring a speech made by BP’s CEO.

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World Market Performance

Index Friday’s Close Week’s Change % Change YTD
DJIA 23,358.24 -83.97 18.19%
S&P 500 2,578.85 -3.45 15.19%
Nasdaq Composite 6,782.79 31.85 26.00%
S&P MidCap 400 1,840.74 14.99 10.85%
Russell 2000 1,492.82 17.55 10.00%

Market at a Glance *

* Click image to see full size version

Economic Calendar

Date   Release Actual Consensus Prior
Mon
CNY New Loans (Oct)
663.2B 780.0B 1270.0B
USD 3-Month Bill Auction
1.240% 1.185%
Tue
CNY Retail Sales (YoY) (Oct)
10.0%
10.4% 10.3%
GBP Consumer Price Index (YoY) (Oct)
3.0% 3.1% 3.0%
Wed
USD Consumer Price Index (YoY) (Oct)
2.0% 2.0% 2.2%
USD Retail Sales (MoM) (Oct)
0.2% 0.0% 1.9%
Thur
EUR Consumer Price Index (YoY) (Oct)
1.4%
1.4%
1.4%
USD Initial Jobless Claims (Nov 10)
249K 235K 239K
Fri
CAD Consumer Price Index (YoY) (Oct)
1.4% 1.4% 1.6%
USD Housing Starts Change (Oct)
13.7% 5.6% -3.2%

 

DeGroote MarketWatch is a weekly financial newsletter prepared primarily by students. It is designed to inform and educate the community. It is an educational tool. The DeGroote School of Business is not responsible for the consequences of actions taken based on DeGroote MarketWatch.
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