How full is the energy glass?

Amid all the gloom and doom reporting about the economy and financial markets in the news media, a friend sent me an energy market assessment by Michael Smolinski, an industry analyst with Phoenix-based Energy Directions Inc. and a well-respected contrarian. In his analysis, Smolinski points to a number of factors that may indicate that:

a) the economy is stronger than we think; and
b) the situation is starting to improve already.

Although headlines are pointing out that unemployment has reached its highest mark in 26 years, they fail to mention that the US population was about 232 million then – 72 million fewer than today’s population. So, obviously, there are a lot more people gainfully employed today than there were in 1983. People are still working, consuming, using up, and wearing things out, says Smolinski.

Another sign that things may be on the upswing is electricity generation. For the last week of January, our nation’s power producers generated 81.253 billion kilowatt hours of electricity. That is nearly 25% greater than the same week last year and second only to the record of 83.459 needed two years ago.

Natural gas inventory is also on the decline, which if it continues, should foreshadow an increase in prices, which would be great news for hard-hit producers. Smolinski points out that Canada, our largest source of imported natural gas, is using more gas and supplying less of it to US markets.

Finally, our friend Allen Brooks over at Parks Paton Hoepfl & Brown recently said that he believes this energy downturn may be more like the 2001-2002 market correction rather than the 1980s energy bust. It’s a disservice to explain his theory and his rationale in a few short sentences (read his “Musings from the Oil Patch” dated Feb. 3 for a more thorough explanation), but Brooks notes the current downturn has seen 516 rigs idled so far, which represents a 25% retrenchment.

If this downturn were to match the 2001 decline, there would be another 357 rigs yet to be idled. This would be a net loss of 873 rigs from the rig count that peaked at 2031 active rigs last fall. This decline matches pretty closely the 2001 decline and that forecast by Nabors Industries late last fall as well as Brooks own forecast in November.

What do you think? Is the energy glass half full or half empty?