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Trading Lessons

Crude Oil Prices And The 'Peak Oil' Environment

Commodities / Crude Oil Mar 22, 2012 - 07:15 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticlePeak Oil can be defined at least 4 ways but one way is simple: Peak Oil is when supplies and stocks are tight enough, relative to demand, to make price slides short and price hikes long, until and unless the economy tilts into recession or by policy decision in response to a dysfunctional and parasitic bank, finance and insurance sector is either pushed or allowed to fall into recession.


The most recent example of this was in 2007-2008 culminating in US Nymex oil prices at around $145 a barrel, with little or no difference between Brent and WTI prices.

Today in March 2012 the oil importer countries of the OECD group, according to their energy watchdog agency the IEA are consuming about 46.25 million barrels per day (Mbd), still 1.25 Mbd below the 5-year average for oil consumption by the 30-nation developed economy group, and about 1.33 Mbd below their early 2008 demand peak.

Taking the OECD group's total population of about 1.10 billion, this oil consumption rate is an average of around 15.3 barrels per capita per year (bcy). At the same rate of oil demand, China would consume 54.6 Mbd (real consumption in early 2012 is 9.3 Mbd) and India would consume 50.1 Mbd (real consumption in early 2012 is 4.3 Mbd).

To be sure, a few countries on the planet for example Saudi Arabia and UAE consume as much as 30 - 32 bcy, but there is no conceivable way the planet's entire population will ever reach the OECD's average per capita oil consumption rate. We can forget that. And we can move on to talking real.

NO DEMAND LIMIT
The OECD with 14% of world population consumes slightly more than 50% of world total oil supplies - but the problem is that nonOECD consumption is growing fast, more than compensating the sluggish oil demand growth of the OECD driven by its sluggish economic growth. Over the decades since the 1970s oil shocks, various long-running energy policy initiatives inside the OECD group are theoretically aimed at using less oil, and the already 10-year-old green energy quest is promoted as "able to save oil".

In every case, the near-mystic goal is to return us to the Great Times when oil cost $1 and 50 cents per barrel.

In the real economy, only recession cuts cut oil demand, shown by the OECD group's oil demand only starting to recover now, in early 2012. IEA forecasts of global oil demand growth in 2012, of 0.9% or 0.8 Mbd are likely a major underestimate, made with the intention of trying to put a brake on rising oil prices.

To be sure, green energy boomers can promise us all-electric car fleets, but today wind or solar-powered 6-cylinder sedan cars are absent from our streets, while world agriculture, shipping and aviation are very close to 100% dependent on oil, in the same way as the world's mining, plastics and petrochemicals industries.

For at least 6 years, as the run-up to the 2008 oil price peak was under way, the threat of Chinese and Indian demand "stealing oil from the OECD group" has played as a background theme, while the Asian Locomotive of oil-intense and very fast economic growth in China and India was also hailed - sometimes by the very same analysts and economic talking heads !

Oil fear in the direction of China and India is easy to understand. China's national consumption in 2001 was 3.67 Mbd but at end 2011 was running at 9.3 Mbd for an average annual growth on a 10-year basis of 9.74%. India's average annual growth of oil demand since 2001 was more than 6%.

These growth rates are, to be sure, declining but for world oil supply any growth of world demand at even 1.5% a year, sustained over more than 3 or 4 years, is impossible to satisfy, because this would create a permanent Peak Oil context. The acid test question is: can the world attain, and then sustain more than 95 Mbd of production ?

SUPPLY CUTS OR DEMAND CUTS ?
As we know through checking oil demand trends in Europe's PIIGS since 2008, sharp cuts in oil demand through recession and almost exclusively due to recession were an effective "strategy" for buying time, before the next Peak Oil price ride towards $150 a barrel. Not surprisingly however, the political blowback and economic damage through using all-out recession as an oil demand control tool will rise, and can only rise each time the trick is used. Coming out of recession, we get formerly "pent up" and fast oil demand growth, pushing us back to the Peak Oil ceiling with leaden predictability.

Oil supply forecasts by agencies like the IEA and US EIA are obliged to underline the extreme low rate of net annual additions to global capacity, after depletion losses, which for oil prices translates to an overblown reaction by market operators to the slowly growing and small-sized embargoes on Iranian supply, possibly cutting 0.6 - 0.8 Mbd from markets by July, if the embargoes are maintained. This can be compared with the IEA forecast of 0.8 Mbd for the total of world oil demand growth in 2012, and its estimate that total net additions to world oil production capacity were 0.1 Mbd in 2011.

At this time, countries such as France are demanding that release of IEA-monitored emergency stocks of oil in OECD countries should at least be talked about, to push down oil prices a few days on oil markets where call futures on oil outweigh put options and the pricing structure is moving towards contango. Oil market prices are high and converging at a high level, pulled up not down by continuing high demand and anticipations that oil demand growth will be higher than current IEA and EIA forecasts.

Trapped in a Peak Oil context that very notably the IEA had forecast as likely "by about 2017", but arriving 5 years ahead of schedule, the potential solutions for political deciders are highly shrunken in number, and radical. Because the supply side offers so little - despite Saudi Arabia, right on cue, promising magic feats of oil production and oil shipping to Friendly Consumer States at $125 a barrel - the de facto solution is economic. Back to the past, not future, is the only way to cut oil prices: through triggering a deeper and steeper recession - but it is election year or run up to election year in the US, France and Germany !

Economic growth in China and India has major potentials for carrying on, regardless, and "Chindia" is joined by other Asian, many African and Latin American countries and the OPEC and NOPEC states in not being particularly interested in all-out recession as an oil demand tool that could or might crater oil prices for a short while.

OECD OIL OR NON OECD OIL ?
The IEA estimate of early 2012 OECD oil demand at about 46.25 Mbd still sets the OECD's demand at slightly more than 50% of global total demand, but simply through faster growing oil demand in the nonOECD countries they will soon outstrip the OECD as majority consumers of world oil. This fact has political implications, as well as strong economic effects we can see any time we look at US and European trade deficits with China and India, and other emerging economies.

The takeover of majority oil consumers by the non OECD countries will also tend to raise, not lower, the expected growth of world oil demand for a 1% growth in world GDP. The OECD trick of calling a recession, throwing millions of workers in the gutter and ruining thousands of enterprises, because oil prices hit some Pain Threshold, will decreasingly buy a cheap oil interval, like 2009-2011.

Even worse for the OECD's deciders and political talkers, the slow-growing and high unemployment OECD group's oil economic demand performance in the recession years since 2008 is more intensive than in the recession years of 1980-1983. The Reagan and Thatcher recession produced bigger cuts in oil demand for the same number of persons thrown in the gutter, the same number of enterprises ruined and the same number of industries delocalised - when in dollars of today's value oil prices attained a high of about $213 a barrel, in 1980, according to US Commerce Dept estimates.

Oil demand contraction has become harder with each subsequent cut in average per capita onsumption: since 2009 and even with massive unemployment the OECD is more oil-intensive than in the Thatcher-Reagan recession years "caused by high priced oil", in theory, and by extreme high interest rates, in reality. The global power to cause economic harm, by calling a recession because of an obsession with cheap oil is now slipping from the OECD's hands.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Benjamin Croser
22 Mar 12, 19:34
How does it all work

Writing as a layman on energy/world finance/ oil trade I am aarmed by Andrew McKillop's underlying conclusion that world leaders, at least in the OECD block, engineer recessions. I am in no position to disagree with him, however, it should be painfully obvious that political leaders come under very great national criticism when recessions hit the working and already unemployed citizens. Andrew obviously knows this, but how does he reason the leaders are getting any benifit from artificially staving off Peak Oil highs? Would not recession be a bigger hit to an economy , or a range of economies, because of reciprocal trade arrangements, market decline etc, rather than higher oil prices? Is it simply that the leaders, and their elite class, are insulated from the short term consequeces of economic contraction? Is it also the case then, that these tactics he poses are being employed to keep oil prices down, are a pretty low last resort to the problem of so much embedded costs of, and therefor risks, of oil in the world economy? I need some help, short of doing an economics degree, any analysis is welcome. An extended answer would be of great benifit to those of us struggling to understand how the whole 'bloody' world market economy works!,( or doesn't. Is it really dog eat dog?)

B.Croser

Sydney Australia.


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