Looking for Oil Demand in All the Wrong Places

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Looking for Oil Demand in All the Wrong Places

Posted by Jeff Rubin on March 10th, 2010 under SmallerWorldTags: china, india, OECD, oil depletion, oil supply, OPEC, triple-digit oil prices • 8 Comments

It’s Wednesday, and the week’s US oil inventories numbers will soon be out. I have no clue what they will say, nor much interest, either. But others do.

Exactly why oil traders and speculators think the data has anything to do with the state of world oil demand is beyond me. I suppose, like Pavlov’s dog, they’re only doing what they’re trained to do. But their training comes from a world that no longer exists.

While the US oil inventories data pertains to the largest oil-consuming nation on the planet, it is no more indicative of world demand than US oil production numbers are indicative of world supply. Both are in terminal and irreversible decline.

It certainly wasn’t US fuel demand that took oil prices over $100 in the first place, and it won’t be US fuel demand that will push them back into that range anytime soon. US oil consumption is almost 3 million barrels per day short of its pre-recession peak.

But the fact of the matter is that US oil consumption will never regain its pre-recession peak, just as US motor vehicle sales will never again see the levels that prevailed before the recession. Ditto for oil consumption in Canada, Western Europe, Japan, or, for that matter, anywhere in the OECD economies.

Back in the 1990s, that kind of demand contraction in the OECD would have foretold a big decline in oil prices, since those countries accounted for almost three quarters of global oil demand. Today, they account for barely half, and tomorrow they will account for even less.

Just as the developing world has long surpassed the developed world in terms of coal consumption, the same is about to happen with respect to oil. Between explosive growth in oil-thirsty economies like China and India, and OPEC’s voracious appetite for its own fuel, OECD fuel markets are becoming increasingly marginal. That’s why Saudi Aramco is far more interested in securing long-term supply contracts with rapidly expanding domestic oil markets in countries such as China and India than in supplying shrinking oil markets like those in the US.

In a world where affordable oil supply will soon peak, if it hasn’t already done so, global oil consumption quickly becomes a zero-sum game. As China moves from consuming 8 million barrels a day to 10 million barrels, and OPEC ramps up its own daily consumption from 10.5 million to 12 million barrels, somehow, somewhere else in the world, there must be a corresponding decline in oil consumption. That somewhere else just happens to be the US market and the oil markets of the other OECD economies.

So instead of thinking that a decline in US oil consumption means a build-up in global oil inventories, just think of it as freeing up another barrel to be guzzled in China or the Middle East.

jdford

Indeed. We've already seen a glimpse of what happens when China bids for the world's oil supply. The result was a recession. It's no coincedence that oil prices peaked just as China finished securing energy to ensure adequate supplies for the Olympics, and prices receded when that demand subsided.

http://blog.jdford.ca/recession-over–think-again
C.

Germane harangue here:
‘Peak Demand,’ Yes, But Not the Nice Kind
Why There Will Be No Recovery
http://www.getreallist.com/peak-demand-yes-but-…

…snip:

…The fact is that peak demand in the OECD is not merely a function of efficiency gains and biofuels substitution, aided by a temporary recession.

Instead, peak demand will be the result of a permanent state of increasing depression in which non-OECD countries not only more than make up for the loss of OECD demand, but outbid them for the marginal barrel.

As we enter the post-peak phase of global oil supply sometime around 2012-2014, the price that heavily import-dependent countries like the U.S. would have to pay for that marginal barrel will become increasingly intolerable. In a weakened economy, $100 a barrel (or less) could be the new $120.

The true import of peak oil, therefore, may not be sustained high prices, but economic shrinkage. Demand will be destroyed long before oil gets to $200 a barrel, but it will not be destroyed by improved efficiency. …

C.
mikeshedlock

Anyone who thinks that world oil demand is about to shrink is nuts. As soon as deflation grabs the reins of this wild horse we're riding oil demand will explode. Just think of how much more gasoline will be consumed when the price of a gallon is $1.50 again? Why will the price drop so low? Unemployment is the answer. When people are unemployed they can't afford luxury items and they'll cut back on some necessities like, food and shelter. But driving a car will remain the last thing consumers will give up. And oil is still the best source of energy for car owners. I predict $100 oil within the next 10 years.
Jim

This is a good article. Oil is going to get more expensive!
“By Marin Katusa

01/21/10 Vancouver, British Columbia – Over the next year or two, you will likely find yourself paying a LOT more at the gas pump. Big changes are taking place in the oil industry. With increased global demand and declining supply, easy oil is not so easy anymore.

Everything is about to get more expensive. From gasoline to anti-freeze, life jackets to golf balls, and eye glasses to fertilizer. There are very few things in the modern world that aren’t made from oil, made by machines dependant on oil, or shipped by vehicles powered by oil.

The implications, at first glance, appear to be the opposite of good news. In fact, it’s enough to strike panic in the hearts and wallets of the average consumer.

And that’s exactly why the International Energy Agency just released its annual World Energy Outlook, clearly rejecting the possibility that crude output is now in terminal decline. Their attitude seems to be, what you don’t know won’t hurt you. For now that is.

The truth is beginning to surface, however, and from an investor’s perspective, the truth can mean money in the bank. Right now, the IEA’s claim that oil production will be ramped up from its current level of 85 million barrels per day to 105 million barrel per day by 2030 is receiving harsh criticism.

The Guardian reports, “The world is much closer to running out of oil than official estimates admit.” This observation comes from a whistleblower inside the International Energy Agency who states the fear of triggering panic buying has caused them to intentionally underplay the inevitable shortage.

Kjell Aleklett, professor of physics at the Uppsala University in Sweden, and co-author of a new report ‘The Peak of the Oil Age’, states “oil production is more likely to be 75m barrels a day by 2030 than the ‘unrealistic’ 105m used by the IEA.”

According to Professor Aleklett’s research, the IEA is making a dangerous and unjustified assumption – one that is dependent upon the oil industry’s ability to ramp up production to levels never before achieved.

Are you beginning to see the opportunity here?

Whistleblowers and scientists are not the only ones disputing the IEA’s report. The folks who pump oil aren’t buying its rosy scenario either.

•Total SA, the French oil giant, that is making its move into the Alberta oil sands, doesn’t accept the IEA’s optimistic claims. The company runs on the belief that oil production won’t surpass 95 million barrels.
•Former chief executive officer of Canada’s Talisman Energy, Jim Buckee, agrees the IEA prediction is nonsense.
•Sadad al Husseini, energy consultant and the former exploration and production chief of the world’s largest oil company, Saudi Aramco, recently said, “Oil supplies have reached a capacity plateau and will not meet a growth in demand over the next decade.”
The Globe and Mail recently joined the debate stating, “New [oil] fields, generally smaller, are less productive than old ones – note the virtual freefall in production rates from the North Sea fields, which reached peak output in 2000. Another reason [for the decline] is development pace, or lack thereof. The yet-to-be-developed reserves in the WEO report cover 1,874 fields of various sizes that would have to come into production in the next 20 years.”

That works out to almost eight new fields being brought to production each month. A realistic target? Only time will tell. Even if the oil exists, the next question becomes one of money, and where it will come from in order to keep this pace of development on target.

When you add in professor Aleklett’s conclusion that production will shrink to 75 million barrels per day by 2030 – almost one-third less than the IEA’s figure and 10 million barrels less than current production, it’s easy to see why investors need to take notice.

Shrinking supply and ever-growing global demand are creating an unparalleled investment opportunity. The current price of crude could be the bargain of the century.

Until next time,

Marin Katusa
for The Daily Reckoning”
davidtarbuck

Perhaps Canada can follow the lead of Norway in absorbing Petro Funds in a constructive way?
In any case a scramble to extract a finite resource as quickly as possible is shortsighted; why not let as much as possible appreciate over time in the ground before being drilled or mined?
segestan

Whatever adjustments have to be made in the west , the end of globalization is just what the doctor ordered. Thank Goodness for the fall of oil production.
segestan

Whatever adjustments have to be made in the west , the end of globalization is just what the doctor ordered. Thank Goodness for the fall of oil production.
posconvex

Any discussion about oil prices over the next decade must include an attempt to quantify emerging economy demand as an important driver at the margin. Here is a simple thought experiment using Chinese demand:
- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year over the next 30 years
- No peak in global production

In next 10 years we must find 44 million BOPD:
- 26 million BOPD to maintain supply – 30% of current production, almost 3 times Saudi Arabia’s output
- 18 million BOPD to keep up with demand – 22% of current production, almost 2 times Saudi Arabia’s output

If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years:
- Oil demand elasticity of -0.3
- Current production 84 million BOPD, current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%

If you want to try the model for yourself using your own assumptions it can be found at Petrocapita: http://www.petrocapita.com/index.php?option=com_conten...

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

Looking for Oil Demand in All the Wrong Places