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John Mauldin: Sometimes They Ring a Bell

After last week's discussion of the Affordable Care Act, it would be easy to drift off into all of the negative consequences of the current problems in Washington DC. There's just so much
After last week's discussion of the Affordable Care Act, it would be easy to drift off into all of the negative consequences of the current problems in Washington DC. There's just so much negative energy every time you turn on the TV that it simply drains you. I am well aware of what's happening and why, and yet I still find myself weary simply from the process of trying to follow what's happening. If I feel that way, it's no wonder the polls show that the general public's attitude is "a plague on all your houses." Of course, the snafus always seem to get resolved, but you just wonder how worthwhile all the drama is.

In this week's letter, though, we are going to talk about a different type of energy and a story that I find enormously positive. Three items have come across my screen in the past month that, taken together, truly do signal a major turning point in how energy is discovered, transported, and transformed. And while we'll start with a story that most of us are somewhat aware of, there is an even larger transformation happening that I think argues against the negative research that has come out in the last few years about the reduced potential for growth in the world economy.

Sometimes They Ring a Bell

This week we learned that China has become the #1 oil importer in the world, surpassing the United States. A few weeks ago the Energy Information Agency (EIA) reported that the US is now the largest producer of oil in the world, surpassing Russia. And the port of Houston is now the biggest port in the United States, surpassing New York (think chemicals and energy-related materials). Those of us who pay attention to such things have known these events were going to happen for a long time, but even so, this is a big deal. Let's glance at a few charts to see if we can get a feel for the magnitude of the changes.

First let's look at total world energy consumption (charts from Notice that the vast bulk of the growth is in the developing nations. More than 85% of the projected increase in global energy demand from 2010 to 2040 occurs among the nations outside the Organization for Economic Cooperation and Development (OECD), driven by strong economic growth and expanding populations. In contrast, OECD member countries are, for the most part, already more mature energy consumers, with slower anticipated economic growth and little or no anticipated population growth. Further, the developed nations are becoming much more energy-efficient, as we will see.

Some people see this huge demand for energy as a problem. The large oil fields of the world are clearly "peaking out," and the concern, sometimes quite shrill, is that we will run short of energy in a few years.

The biggest changes, of course, are happening in China and India. Since 1990, energy consumption in both countries as a share of total world energy use has increased significantly; together, they accounted for about 10% of total world energy consumption in 1990 and nearly 24% in 2010. From 2010 to 2040, their combined energy use more than doubles, and they account for 34% of projected total world energy consumption in 2040. I am not sure that China will continue to grow along the same trajectory that it has, but I also feel that it's likely India will grow even faster than projected, so the endpoint may be the same.

And while production from the old oil fields of the world is in fact beginning to slow, we are finding new oil and natural gas at an even more rapid pace than before. For instance, in my backyard, Texas crude oil production, at 2,525 thousand barrels per day (MBPD), was 31% higher year-over-year as of May. North Dakota crude oil production, at 810 MBPD, was 27% higher year-over-year. These two states are driving total US growth in oil production and have helped offset declining production in Alaska and the Gulf of Mexico.

This growth is simply astounding when we look back over similar periods in history. Understand, the oil fields we are talking about have been in production for over 60 years. These are not new discoveries in the strictest sense, but a manifestation of the transformation that is occurring in energy-production technology.

I've written several times about the amazing new production in the Bakken in North Dakota. That is being dwarfed by the potential of other fields. RBC offers the following notes (emphasis mine):

Eagleford Oil Volumes Nearing the Bakken

The Texas Railroad Commission released preliminary 2013 March and revised February Eagleford Shale oil production rates of 529.9 Mbbl/d and 511.4 Mbbl/d, respectively, representing a 77% increase from March 2012 production. February data was revised up from its prior report of 471.2 Mbbl/d. While the trend is correct, we believe actual production in the Eagleford is higher than what is being reported. Well-by-well production data obtained from our proprietary database has current oil production from February nearing 760 Mbbl/d, up 94% from year-over-year levels. Our preliminary March data is not fully updated, but recent month-over-month production has increased on average 5% a month.

The growth of the Eagleford has been impressive and we think it will likely pass aggregate Bakken oil production in the near term. The most recent statistics from the North Dakota Oil and Gas commission have North Dakota production at ~782 Mbbl/d in March, up 35% from March 2012 levels but lagging the growth of the Eagleford on a relative basis.

I've noted in previous letters that there may be as many as four distinct oil- and gas-producing zones layered on top of each other in North Dakota. So the Bakken could be four times as big as we think today. It now looks like similarly explosive growth is happening in the Permian Basin in Texas. In a large rather "new" field called the Spraberry/Wolfcamp, the potential for finding oil is simply astounding. In fact, Pioneer Natural Resources is suggesting that it is the second biggest oilfield in the world (see table below).


While we are finding more oil in the US, we are actually using less. US motor-vehicle gasoline consumption peaked at 142 billion gallons in 2007. In each year since, American drivers have used less gasoline. In 2012, gas use came in at 134 billion gallons, down 6% off the high mark. This trend results from a combination of two factors: new vehicles get better gas mileage, and we seem to be driving less.

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