Real
world oil demand
By
Andrew McKillop
Background: Compared to July 2006, when we had similar prices,
we have one massive and little remarked difference today: there
is
nothing like the geopolitical risk we had in July 2006 at the
height
of Israel’s intense bombing and artillery shelling war
against Lebanon.
At the time, the geopolitical risk premium (GRP) was estimated
at anywhere from 15 to 30 USD-per-barrel. Today’s GRP
is likely
only about 5 to 7 USD-per barrel. It therefore has a lot of
growth
potential, and not much downside potential.
The underlying base for high prices is short supply, because
the
world is one more year closer to Peak Oil than in 2006. Coupled
with over-discounted risks to supply, prices can fly at the
touch of
the right panic button.
Under several scenario – far from ‘worst possible’ – the
current
and low GRP could double or triple, very quickly adding 5 to
15
USD to the barrel price, and yielding daily spot and forward
prices
in the range of 80 to 90 USD-per-barrel.
This in turn would surely affect dollar sentiment, the gold
price,
and equity values. Gold could add 25 to 75 USD per ounce very
fast, the dollar would first weaken but then strengthen, and
equities
could shrink fast, in the US Europe and Japan, with a possible
rapid and powerful knock-on to equity values in China and the
rest of Asia.
UNDERESTIMATED GEOPOLITICAL RISK
Regional focii: In July 2006 the extreme focus of geopolitical
risk
was exclusively the Middle East. Today there is remaining and
intense
tension in the Mid East, but new tensions are widening and
deepening its scope and impact outside the region. Today also,
geopolitical risk in Nigeria, Venezuela and Russia, and elsewhere,
is much stronger than last summer.
Middle East: at this time, some 140 000 Turkish troops are
stationed
on the frontier with Iraqi Kurdistan, ready to invade. Approximately
10 000 are operating inside Iraqi Kurdistan at any one
time. Turkey has two claimed objectives, the first of which
is freely
stated by Turkish politicians and the media, the second less
officially
but increasingly often.
The freely stated, official objective is to fight the renascent
Kurdish
PKK, claimed by Turkey’s joint chiefs of staff to be
aided and abetted
by Barzani’s groups, with the help of Iran and tolerated
by
Talibani’s groups. In February 2005 G W Bush received
Massoud
Barzani and Jalal Talibani at the White House where he gave
each a cheque for 1.5 Billion USD ‘as a mark of American
public
appreciation for the role played by Kurds in overthrowing Saddam
Hussein’ End of quote. Barzani, we can note, has offices
in
Tehran even if his sons drive Ferrari in Nassau, Bahamas.
West Asia: the Mushurraf military regime in Pakistan, almost
ignored
by a large slice of public opinion in Pakistan because economic
growth is at record highs, about 7%/year, is however now
contested by a powerful and bizarre coalition of forces. This
coalition
could be compared to the coalition that overthrew the Chah
of Iran in 1979, being made up of a small but fast increasing
number
of vocal, modern, democratic and educated opponents, and a
huge mass of Islamic opposition forces. Their only common cause
is anti-American and anti-Western sentiment. The ‘doves’ in
all this,
specially the lawyers’ and human rights activist coalition
opposing
Musharraf’s army regime on constitutional and legal grounds,
would likely be swept away by the huge Islamic opposition forces
when Mushurraf fell or was assassinated. Invading Pakistan
to install
or maintain pro-Western government in a country with at
least 150 nuclear weapon devices and a population of 160 million,
would be very ‘high risk’, at least equal to, or
more than the
risk of invading Iran. When or if Musharraf falls, the Afghanistan
war will literally explode in intensity, with the Europeans
cutting
and running even faster than the US. Canadian and European
support to this war is now at an extreme low.
Russia: Putin very surely no longer has the ‘friend of
the West’ halo
he had when as Yeltsin’s second the 1990’s Kremlin
indulged in a
bargain basement, fire sale giveaway of Russia’s natural
resources,
and especially oil and gas resources to US, European and Japanese
corporations. Today’s Kremlin acts very different.. The
diplomatic
crisis with the UK over the bizarre London polonium poisoning
case can quickly become more dramatic. The UK has expelled
Russian diplomats. It is now Putin’s turn to respond
and show
his strength.
No real settlement of the ‘East European anti-missile
shield’ affair
has been achieved. In a confrontationist stance criticised
by several
West European leaders, the US is continuing with its plans
to install anti-missile batteries in Poland, Romania, Czech
republic
and perhaps elsewhere. Putin threatens H-bomb equipped missile
deployment in Kaliningrad as a calculated and equally confrontationist
response – announced the day after his ‘Lobster
Summit’
meeting with G W Bush. In addition, he can use the oil and
gas
card when he wants. Europe is extremely dependent on Russian
gas and heavily dependent on Russian oil.
The Georgian stand-off, also involving Turkey, can shift into
higher
gear at any time. The impact on oil prices of widespread armed
conflict in Georgia affecting pipeline deliveries would be
very
strong, due to the potential loss of around 1.2 million b/d
of supplies
in the summer driving and air travel seasonal peak of oil demand.
Nigeria: the under-recognised civil war in Nigeria is becoming
better
understood for what it is. This is a long-term multifacet conflict
focused on oil and oil revenues. All the Nigerian militias
party to
the conflict such as MEND recognise this, and exploit it. New
developments
include attack on offshore oil installations, these installations
formerly and supposedly being ‘inviolable’ because
they
are offshore and ‘far away’ from onshore fighting.
Estimates of actual shut-in and lost oil production are highly
variable.
What is more important is to know how much additional capacity
could be knocked out by insurgents, and on what timescale.
Some estimates put this at another 0.25 Mbd and able to occur
at
any time.
Venezuela: Little real attention has been given to Venezuela’s
de
facto nationalisation of Orinoco Belt heavy oil production,
upgrading
and refining for export. Conoco and Exxon, in particular, have
decided to pull out of, or drastically reduce their exposure
in Venezuela
– usually a sign of coming and official US administration
‘
displeasure’ building to ‘regime change’ threats.
This is essentially
what Chavez wants on political grounds. In turn and however,
this ignores the technical and oil resource factors: Venezuela’s
net exports and production are falling the fastest among the
big
OPEC member countries. To gain more revenues or at least prevent
them falling, Venezuela must valorize Orinoco heavy oil very
fast. Similar to the Putin regime’s accusation that US
and European
oil corporations are not investing enough or moving fast enough
to develop new reserves or upgrade existing production in Russia,
the Chavez regime calculates that a resource nationalism strategy
can on balance accelerate development and lever up oil prices.
INCONVENIENT TRUTHS ABOUT WORLD OIL DEMAND
A convenient lie about world oil is that demand growth is now
‘
modest’, except of course in China and perhaps India,
to produce
the cheap industrial goods which will soon include cheap cars
and motorcycles, that ‘postindustrial’ USA, Europe
and increasingly
Japan consume in ever vaster quantities.
High oil prices are held to have a ‘price elastic’ impact
on oil demand
in the more mature, ex-industrial economies, but this cozy
notion is totally contradicted, for example, by US gasoline
demand.
After some ritual whining, US car owners stump up the extra
cash
to run their average engined 250-horsepower wagons, and 500-
horsepower monsters still get sold, and still use about 11
or 12
barrels of fuel per year, each.
The highly mediatized ‘onrush of biofuels’ is also
thought to be
curbing world oil demand growth, offering the promise or fervent
hope of oil prices being talked back down to ‘reasonable’,
that is
cheap levels, perhaps this winter when or if climate change
delivers
abnormally low heating oil demand, as in early 2007.
At that time, the herd of employable oil ‘experts’ was
forecasting
30-dollar oil as ‘just around the corner’.
My, how times have changed ! Almost without tighter sanctions
against Iran for it’s A-bomb program, or heroic Israeli
bombing
raids on Beirut, and only the regular death toll in Iraq ‘moving
towards democracy’ to offer as a convenient lie that
high oil prices
are all about geopolitical risk, and nothing to do with fundamentals,
price have effortlessly moved to nearly 80 USD/barrel..
The fundamentals are supply and demand.
Supply is an obsession of the US EIA and OECD IEA, as befits
supply-
side economists and their fantasy ideas, but even these august
institutions do not see gushers of new, cheap, light and sweet
crude supply emerging; Where it does emerge, off Angola for
instance,
it comes from under the waves and up to 4000 meters of
ocean water depth below the waves. Finding deep-sea exploration
rigs is now rather expensive, typically costing 500 000 US
dollars-
per-day.
Foregoing these heavy expenses and profiting from high oil
prices,
and royal crack spreads, is a better strategy for the world’s
oil
majors – the majority of which recorded a net fall in
their oil production
in 2007. Record high oil prices, therefore, do not automatically
lead to increased supply. Supply siders will assure, hand on
heart, that you only have to wait – but the waiting is
long and in
that interval oil prices rise. Granted, the oil trading circus
allows for
sudden speculative price changes of + or – 15% or 20%
in the oil
price. This market flexibility is not for example accorded
to prices of
cars, houses, food, clothes, airplane travel, manufactured
products
and all the other things that totally depend on energy, cheap
or
expensive. Not yet, we can add.
DEMAND FUNDAMENTALS
Demand is conscientiously downplayed, even squarely ignored
by
the EIA and IEA. Their mission is to struggle against facts
and ‘keep
oil cheap’, by spinning a fantasy web of new supplies
of cheap oil
just over the horizon, sure and certain, Wizard of Oz style.
China, however, is now publicly presented as the ogre of the
piece, unreasonably increasing its oil demand in the exact
same
way as Korea, Japan or Taiwan did in their economic growth
heydays,
or Europe and the USA did in the Trente Glorieuse years of
vintage economic growth that terminated around 1975. At the
time, 5% or 6% or 7%-per-year oil demand growth was entirely
normal, even de rigueur. Why should this not be the case for
China
and India today ?
China and India currently have dwarf car fleets, relative to
OECD
countries, shown by a few stark figures. China and India’s
combined
population of around 2.3 billion, about 37% of the planet’s
total, count about 25 cars per 1000 population, higher in China
and lower in India. The US has about 700, the EU27 countries
about 400-550, and Japan and South Korea about 450. The
growth potential in China and India is simply ‘unlimited’,
as the
world’s carmakers say, rubbing their hands in glee.
Even worse for cheap oil aficionados and the stoic book-cookers
at the EIA and IEA, oil demand is close linked to Belle Epoque,
vintage
economic growth rates at about 4% to 9%-per-year in East
Europe, Russia, the Middle East, Latin America – and
even Africa.
This ultimate basket case commodity exporter continent, condemned
to IMF austerity cures (in the world’s poorest countries
!)
through the long night of fire sale, bargain basement commodity
and energy price, 1986-1999, is now getting its revenge.
Africa’s oil demand growth is now running at about
5%-per-year,
threatening to garrot the hoped-for gushers of cheap African
black crude the IEA and EIA so thoughtfully programmed for
Africa’s
basket case ‘price taker’ oil exporters.
In the Middle East, drunk on petrodollars and building Manhattan-
style cityscapes and 16-lane highways to service them, in the
desert at 55°C in summer, the non regime-changed Happy
Few
record oil demand growth rates of 7% or 9%-per-year, sometimes
more, as in the ex Soviet muslim southern republics.
THE BOTTOM LINE
Both the IEA and EIA have manfully informed hopeful believers
that world oil demand growth is ‘perhaps 1.4%-per-year’,
perhaps
due to biofuels, mass youth unemployment in West Europe,
permanent economic stagnation in Japan, de-industrialisation,
or some other cause such as climate change. Since about May
2007 this storyline has cracked, reality has peeped through,
and
believers have been told they can now believe that even the
USA,
consuming an average of about 25 barrels per person, per year,
is
increasing its oil burn at around 1.5% to 1.9% per year.
A fully globalised world economy consuming at that rate would
burn about 445 million barrels/day. This proves, among other
things, that the ‘American model’ is as dead
as the dinosaur,
whatever the Bush Gang and Heritage Foundation might bleat
at the microphone.
If we take the real rate of world oil demand growth, and what
is
real is always better than fantasy numbers for real world forecasting,
we find that world oil demand is growing at about 2 %-peryear.
This modesty is entirely due to coal consumption bouncing
ahead at nearly 6%-per-year, and natural gas at around 4%-peryear.
The biofuels ? It is interesting you posed that question, but
these
entirely marginal, often net energy negative fuel sources are
irrelevant
to the world’s energy predicament. Biofuel aficionados
like to talk in litres-per-year or in US gallons-per-year,
because the
numbers seem so big; There are 160 litres and 42 US gallons
in
a barrel. Taking the US corn ethanol, or Brazil sugarcane ethanol
programmes, these ‘oil killer substitutes’ currently
produce
no more than the oil exporter country of Chad’s contribution
to
world liquid hydrocarbons supply.
Why get fixated about Chad ? Is this a well known oil exporter
country ? Sudan is more interesting, at about 2.5 times Chad’s
net
exports, helping to explain the royal lethargy of regime change
bombing being applied to Sudan.
To be sure, the biofuels craze will surely raise the price
of food commodities.
In the meantime we can wait, with bated breath, for ‘cellulosic-
type biofuels’ using wood, paper wastes, cane stalks,
turkey
guts or whatever to produce the fuel needed for the world’s
850
million cars, increasing at about 70 million-per-year, and
consuming
an average of about 9 barrels-per-year, each.
Andrew
McKillop is Senior Energy Strategist
in Juno
Mother Earth Asset Management, New York. He is a Founder
member, Asian Chapter, Internatl Assocn of Energy Economists
and
Former Expert-Policy and programming, Divn A-Policy, DGXVII-Energy,
European Commission. Author of several books on energy, environment
and development published in UK, Canada and USA.
( xtran9@gmail.com)
His latest book ‘The Final Energy Crisis’ (ISBN
0745320929) is distribute by Pluto Press, London. Its views
are not necessarily those of PETROLEUMWORLD.
Editor's
Note: This article was written originally for Commodity
Focus Juno Mother Earth Asset Management Newsletter 11. Petroleumworld
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