The Next Oil Price Shock — An Update

Having done some analysis, I've decided to postpone my projection for the next oil price shock. I have moved the date from 2012 ± 1 year to 2013 ± 1 year. I've updated the graph below to reflect the timing of the next blow-up in oil prices. The change reflects my view that there will not be a price spike in 2011.

This is not a "price" graph—nobody can predict future oil prices. It's simply a schematic showing that—

• In the "peak oil" era, demand surges cause oil price shocks (the peaks)
• oil price shocks cause recessions and force reductions in demand (the troughs)
• the average price of oil goes up over time (the ascending blue line)

Informally, we can say there's been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months.

There is little doubt that burgeoning oil demand in China will drive the next price shock. I expect total oil demand in the OECD—the developed world, including the U.S, the Eurozone, Japan, Korea, etc.—to remain flat (or even decline) over the next few years. A host of factors make a vigorous economic recovery in the OECD countries impossible to achieve. Therefore, there is little reason to expect a significant rebound in OECD oil consumption.

Of the so-called BRIC countries—Brazil, Russia, India, China—only China has the economic clout to drive another oil price shock. Brazil will easily cover its future needs and is not a significant exporter. Russia's internal oil demand growth is small, and will not affect their export levels anytime soon. Growth in India's oil imports will be modest relative to world demand. So we need to examine the current trend in China's oil demand growth. The first graph shows China's oil imports since 2000, and the second graph shows the more recent trend in China's oil imports.

The data is through April, 2010. The apparent strong price connection between China's oil imports and the oil price has not held up over the last 5 months. The oil price today is $76.88/barrel, which is about the midpoint of its current range $67-$85. (See the next graph).

China's oil demand, in metric tons. Source: Rigzone based on data from Platts. 35 million metric tons = 8.24 million barrels per day.

You can see in the 2nd graph that there is a great deal of volatility in China's oil imports month-over-month. However, the current trend could be labeled "flat" in the range shown. Still, the growth numbers through August, 2010 are frightening—

September 10, 2010 -- China’s crude oil import volume grew 22.6 percent year-on-year to 158 million tons in the first eight months of 2010, reports yicai.com, citing data from the General Administration of Customs (GAC).

The total value of crude oil imports grew 77.6 percent year-on-year to $88.31 billion in the first eight months.

The volume of refined oil imports dropped 8.5 percent year-on-year to 23.88 million tons, while the value of refined oil imports was up 30.1 percent year-on-year to $14.08 billion in the first eight months of 2010.

[My note: Using the standard conversion, 1 metric ton = 7.3 barrels of oil. China's average daily crude oil imports were approximately 4.75 million barrels per day through August.]

If China's oil imports were to grow next year at the same rate they did this year, the Chinese will be importing an additional one million barrels per day in 2011. That's a lot of crude oil, but not enough to create an oil price shock. In so far as I expect oil demand in the rest of the world (excluding China) to increase by (at most) two to four hundred thousand barrels per day in both in 2011 and 2012, I have postponed the date of the next oil price spike.

On the other hand, if this forecast is correct, it will be impossible to avoid an oil price shock before 2014—

The latest China Oil & Gas Report from forecasts that the country will account for 36.78% of Asia Pacific regional oil demand by 2014, while providing 44.91% of supply.

Regional oil use of 21.42mn b/d in 2001 is set to reach a forecast 27.15mn b/d in 2010, then to rise to around 30.21mn b/d by 2014.

Regional oil production was around 8.35mn b/d in 2001 and is forecast to average an estimated 8.82mn b/d in 2010. It is set to increase only slightly to 8.89mn b/d by 2014. Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion.

In 2001 the region was importing an average 13.07mn b/d. This total will rise to a projected 18.32mn b/d in 2010 and is forecast to reach 21.32mn b/d by 2014. The principal importers will be China, Japan, India and South Korea. By 2014 the only net exporter will be Malaysia.

The real question regarding China is this: can they keep this crazy economic growth going? What will happen when their massive property bubbles collapse? The rumor on the street is that the Chinese are building new cities nobody lives in. China's future oil consumption may be overstated. I will have to explore this subject in another post.

 

 

Comments

[Antonio Turiel]

Dave, if the guys at Goldman Sachs are right, present global oil demand is 600,000 b/d over global oil production, the difference being drained from floating storage. This sounds like the prelude of a not-very-far oil spike, what do you think?

The link (seek for September 13, 2010 headline): "Goldman Finds 'Spate' of Bullish Data; Says Oil Price Tide is Turning"

http://www.opisnet.com/wfbs/headlines.html

[Steve Bean]

I think Antonio is on the right track with his question. How will supply (production) factor in over the next year?

[Dave Cohen]

So, there are people out here who believe Goldman Sachs? That interesting ... you folks would be good candidates for their GSCI (Goldman Sachs Commodity Index). You can lose your shirts there ;-)

http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/index.html

I could lay out all the current data and my assumptions about production, economic growth, etc. but rather than do that, I put it to people like Antonio and Steve (above) to demonstrate to me that oil production will fall short of demand in 2011. I would want to see all supply & demand data, assumptions made, etc. Using a model (like a Hubbert curve) will not do. Citing some "authority" (somebody a bit more trustworthy than Goldman Sachs) will not do either, unless you can convincingly demonstrate that they know more than I do.

Good luck with all that.

P.S. About 95% of the confusion "peak now" people have on this issue could be cleared up if they understood the difference between "production" and "production capacity". It would also help to know something about natural gas liquids.

[Alexander Ac]

No, the price should go down, possibly to 10-15 dolars per barel, as a result of DEFLATION, and this will kill future investment in oil production, see eg: http://www.youtube.com/watch?v=uzef43gdupk&feature=player_embedded

[Antonio Turiel]

Sorry, Dave, my point here is not a question of modeling supply&demand, but if we can trust GS estimate (I have no sympathy for those guys either). Let's suppose for a while they are not tricking the estimate; if they were right this would be the kind of sign we must expect from a supply tightening, wouldn't it? So my question to you is: can we trust such an estimate? And at the end price is not the real important question (I agree with you in that we should expect wild volatility) but supply.

BTW, I'm a physicist and I know what one can do with models: models are like piggy banks: what you can get out is what you have got in.

Regards from Barcelona.

[Robert Baertsch]

Dave,
A good way to track Chinese oil consumption is to watch car production. I think they are now producing over 14m cars annually for the domestic market and they add about 1m per year of additional production capacity. They currently have 60m cars on the road. At this rate, they should hit 120m cars (double) in 4-6 years.

Do you know what percentage of current consumption in china is for cars ?

[Winston Smith]

Dave
Dam I have been waiting a long time to cash in on the pain and misery of my dumb co-workers. Have you no compassion? I have been loading up on Energy Trusts, lowered my energy footprint every year, sneered at SUVS, I am ready now for my payoff. Now you tell me that I need to wait one more year. Next you are going to tell me to sell my silver & gold, eat the stores in the basement and buy a Lincoln Navigator.

Winston