Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil Supply And 'Peak Oil' Price Drivers

Commodities / Crude Oil May 02, 2012 - 07:48 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. This will continue until and unless the economy tilts into recession through market forces, or by policy decision in response to either external or internal shocks. Examples of the second feature the post-2008 bank, finance and insurance sector crisis, and the sovereign debt crisis of many OECD countries since 2008.


The most recent example of 'runaway' oil price hikes 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. Only the entry to recession, from mid-2008 and through 2009, cut prices.

Today in May 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 which coincided with the most recent peak price. The percentage share of this 1.33 Mbd cut in oil demand due to recession, compared with all other causes (energy and oil saving, development of renewable energy) is very high, and can be set at a minimum of three-quarters of this temporary fall in demand.

STRUCTURALLY HIGH OIL DEMAND
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) on a 2012 basis. 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). Put another way, if the combined present day population of China and India attained today's OECD per capita oil consumption, their combines oil demand would increase to 104.7 Mbd from ther current real world consumption of 13.6 Mbd.

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%.

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 that either China and India, or the planet's entire population will ever reach the OECD's current average per capita oil consumption rate. We can forget that. And we can move on to talking real.

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, due to 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" as well as saving the planet from global warming. In reality, since the 1973/74 oil crisis, global oil demand has increased from a year-average of 59 Mbd to 89.9 Mbd (IEA year forecast) in 2012.

As we know, one sure sign of slow but possibly sustained recovery from the intense economic recession in OECD countries, starting in 2008, is that the OECD group's oil demand is starting to recover now, since early 2012. IEA forecasts of global oil demand growth in 2012, of 0.9% or 0.8 Mbd are likely a considerable underestimate, given the 'pent up demand' factor due to slow oil demand growth, or oil demand contraction in many OECD countries since 2008. It is easy to interpret the IEA's low growth forecasts as being made with the intention of trying to put a brake on rising oil prices.

Global oil demand 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 ? According to several major figures in world oil, such as Total Oil's CEO, C. de Margerie, sustained output of more than about 95 Mbd will not be possible.

SUPPLY CUTS OR DEMAND CUTS ?
The basic choice is therefore simple. Not on a long-term basis, but from the mid-term defined as by or before 2015-2017, oil demand cuts will need to be become constant or structural, not simply driven by recession and followed by demand recovery, itself followed by another price surge as the lowered supply ceiling is quickly reached. As we know from data for Europe's PIIGS since 2008, sharp cuts in oil demand almost exclusively due to recession have provided a certain 'breathing space' before the next Peak Oil price ride towards $150 a barrel. Not surprisingly however, the political blowback and economic or social damage through using all-out recession as an oil demand control tool will rise each time the trick is used.

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. For 2011 using IEA data, this net addition to supply was about 0.1 Mbd, which can be compared with potential supply cuts from the slowly growing and small-sized embargoes on Iranian supply, possibly attaining 0.6 - 0.8 Mbd by July, if the embargoes are maintained. This potential supply cut can also be compared with the IEA forecast of 0.8 Mbd for total oil demand growth in 2012.

Trapped in a Peak Oil pincer where political-decided supply cuts are no longer needed, this context being forecast on many occasions since 2009 by the IEA as probable or possible "by about 2017", the real world supply/demand situation increasingly indicates a much earlier arrival of this 'best by' date. As indicated by the major global 'swing producer' Saudi Arabia, further increase of its net export supply may be possible, but the market price framework is one where Brent prices will be close to $125 a barrel - the de facto solution to supply and to demand is therefore economic.

This can be summarized as 'Back to the past, not future' underlining a central new fact of life for world oil, which is even admitted by 'supply boomers' such as Daniel Yergin of CERA: oil supply growth, and very low annual rates of oil demand growth both need high prices. Unlike shale gas, the expansion of shale oil supplies will not be possible with low oil prices, and as noted above, the only present way to cut oil prices is through triggering a deeper and steeper recession - which is bad politics in an election year or run up to election year !

Making it certain the oil demand cuts will have to come from the OECD, economic growth in China and India through the past decade has shown little negative impact from ever rising oil prices. "Chindia" is joined by other Asian, many African and Latin American countries, as well as the OPEC and NOPEC states in not being particularly interested in all-out recession as an oil demand control tool that could or might crater oil prices for a short while. Their economic growth strategies are long-term.

OECD OIL DEMAND CUTS
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 because of the growth rate differential between the nonOECD countries, and the OECD group, they will soon outstrip the OECD as majority consumers of world oil. This fact has political implications, strong economic effects, and a massive accelerator impact on "who gets what" for world oil supply in the next decade. The question of who is able to pay for oil at rising prices is answered any time we look at US and European trade deficits with China and India, and other emerging economies. Trade surplus countries are able to import more oil at almost any price, as proven by the Asian Tiger economies in the 1975-95 period of their fastest economic growth, and fastest growth of imported oil at rising barrel prices.

The takeover of majority oil consumer status by the non OECD countries, with much higher growth rates of oil demand than OECD countries will tend to raise, not lower, the expected growth of world oil demand for a 1% growth in world GDP. Called the "oil coefficient of economic growth" this has been slipping or declining for as much as 20 years, due to OECD dominance of global oil consumption (and declining economic growth of OECD countries), but this situation is now changing.

Even worse for the oil demand and therefore price outlook, the slow-growing and high unemployment OECD group's oil economic demand performance in the recession years since 2008 is more intensive than in previous recession troughs, according to IEA analysts comparing the post-2008 OECD recession with the recession years of 1980-1983. The Reagan and Thatcher recession produced bigger cuts in oil demand for the same number of persons thrown into joblessness, the same number of enterprises ruined and the same number of industries delocalised: the "neoliberal oil strategy" can therefore  be just as easily criticized as its economic and social strategy.

Forecasting the oil price levels needed to trigger recession  - rather than economic growth through Petro Keynesian growth effects - can compare 1979-83 oil price peaks in dollars of today's value. These peaks attained a high of about $213 a barrel, in 1980, according to US Commerce Dept estimates. Below that price level and on balance (in the absence of deflationary and recessionary fiscal action of the present type) Petro Keyneisan growth effects will tend to propel global economic growth.

What can be called a 'ratchet effect' completes the range of factors making it either certain or highly probable Peak Oil supply impacts, and demand factors will drive oil prices to extreme highs, by 2015-2017 or before. 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 now more oil-intensive in total consumption terms than in the Thatcher-Reagan recession years. At the time described as "caused by high priced oil", the role of extreme high interest rates was decisive. The global power to cause economic harm, by calling a recession because of an obsession with cheap oil is now surely and certainly slipping from the hands of OECD political deciders.

By Andrew McKillop

Contact: xtran9@gmail.com

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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in