1. Oil and the Global Economy
Oil prices have fallen steadily since touching a high of $83 a barrel two weeks ago and closed on Friday at $75.39 a barrel. Demand for gasoline in the US the week before last fell to 9.2 million b/d from 9.6 million in the week ended July 23rd. As has been the case for several weeks, a steady stream of bad economic news convinced the oil markets that the outlook for increased oil consumption is not good. Despite all the gloom, the official forecasters –- the IEA, the EIA, and OPEC -- are still forecasting substantial growth in world demand for oil between now and the end of 2011 with global consumption rising by another million or more b/d.
The IEA estimates that world oil supply rose by 850,000 b/d in July to 87.2 million b/d and forecasts that with business as usual world demand will average nearly 88 million b/d next year. The Agency does warn that there are ―significant downside risks‖ and that a weaker economic situation could reduce their projected 1.3 million b/d growth in global demand to nearly un-changed.
The US‘s EIA is now expecting that crude output from the Gulf of Mexico will fall by an average of 120,000 b/d next year due to the consequences from the Deepwater Horizon explosion, such as the six month drilling moratorium and delays resulting from tougher regulation. The IEA takes an even more pessimistic view, saying that the BP spill places the ability of the oil industry to access new reserves on a ―knife edge‖. The Agency estimates that nearly 50 percent of the new oil supplies needed by 2015 would have to come from offshore fields, much of it from deep water. With operating and regulatory standards likely to be tightened and sensitive areas such as the Arctic seeing permitting delays, the pace of offshore oilfield development could slacken.
OPEC‘s Secretariat also issued a revised forecast for oil demand in 2010 and 2011 increasing its outlook for 2010 and 2011 by 140,000 b/d. The cartel too sees demand for oil increasing by more than a million b/d next year to an average of 86.5 million b/d, considerably lower than the IEA‘s estimate of nearly 88 million b/d for average demand in 2011. OPEC‘s lower-than-usual growth estimate is attributed to sluggish economic growth and large stockpile surpluses.
Any increase in oil consumption next year is likely to come from the usual suspects – China, India, and domestic demand in the oil exporting nations themselves. Whether the global oil industry can absorb another million b/d increase in demand during the next 18 months without growth-shattering oil price increases remains to be seen. OPEC seems to be pumping close to flat out. The Saudis may or may not have a few million b/d of light-enough-to-sell spare productive capacity. Some say that an increase in production from non-OPEC sources may add another 800,000 b/d in the next 18 months. This increase is expected to come from the China, Russia, and even the US where some see a 300,000 b/d increase in production next year – provided of course that regulatory issues don‘t bog things down.
2. China cooling
A spate of new numbers and pronouncements came from of Beijing last week all adding to the question of just where China‘s massive, surging, and, in some sectors, overheating economy is headed. Much of the news focused around record high energy consumption in the first half coupled with a declining pace of economic growth in July. China‘s oil consumption in the first half of the year increased by 15 percent over 2009. Electricity consumption in July increased by 12 percent over last year. As in the case in much of the world, increased use of air conditioning to combat higher temperatures was behind the growing summer demand for electricity as temperatures set new records.
While much was made of the ―slowdown‖ in China‘s growth in the financial press, year over year increases of 14 percent or more in many industrial sectors does little to curb the demand for oil, coal, and electricity. Beijing reported that net crude purchases did fall in July to 18.8 million tons (4.5 million b/d) from 22.1 million in June, but China‘s imports have always been variable. A massive oil spill at a major import terminal did not help matters. Many areas in western China are suffering from severe floods and landslides that must be reducing demand.
China‘s trade surplus widened during July. While export growth slowed slightly to a 38 percent increase over last year, imports slowed to a 23 percent increase in July vs. a 34 percent year over year increase in June. The rather spectacular increases in exports in recent months are attributed to inventory restocking by foreign purchasers and are not expected to continue for the rest of 2010.
As we move farther into the second half of 2010, Chinese growth—although down from the first half—is still impressive by any standard and is likely to keep up pressure for more energy. Last week the EIA raised its forecast for growth in China‘s oil demand by 80,000 b/d to 650,000 b/d in 2010. The EIA also raised its estimate for the increase in China‘s oil demand growth in 2011 by 10,000 b/d to 560,000 b/d. With growth rates such as we have seen in China in recent years, the widely touted ―slowing of China‘s growth rate‖ does not mean much when placed in perspective.
Although China has an impressive list of long-term economic and social troubles, none of these seem likely to derail China‘s rapid economic growth in the immediate future or China‘s steadily increasing demand for substantial annual increases in its oil imports. If this proves to be the case, then projections of 1 million+ b/d for increasing global demand for oil are likely to be valid.
Increasing demand for oil, increasing depletion of existing oil fields, and dimming prospects for the necessary increase in production from new oil fields all suggest that much higher oil prices and oil shortages are likely within the next few years.
Quote of the Week
T. Boone Pickens' plans to save the United States from its energy dependence on so-called hostile petro-powers is, simply put, full of hot air. The abundance of shale gas in the U.S. will no more free the country's motorists from dependence on foreign oil than have either the American production of over ten billion gallons of corn-based ethanol or the rollout of GM's electric-powered Volt.
-- Jeff Rubin, consulting economist and author
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