On 4 October 2009, The Wall Street Journal ran an article
World
Need for Oil Expected to Ease (subscription might be required), where
the author, Spencer Swartz, wrote:
The International Energy Agency next week will make a "substantial"
downward revision to its long-term forecast for global oil demand, a
person familiar with the matter said, marking the second year running
the group has slashed its view of the world's thirst for oil.
...
If demand pessimists are correct, future increases in the price of
crude could be damped as weaker consumption stretches world oil supply
by billions of barrels. Various analyst estimates maintain that the
roughly 2% a year average growth rate in world oil consumption seen
earlier this decade -- the biggest reason for crude prices hitting a
record $147 a barrel last year -- may turn out to be an anomaly and
that annual growth in the neighborhood of 0.5% to 1% is more the norm.
The reality is that no one knows what the long term future
holds. The IEA itself struggles with the Bull versus
Bear oil outlook. Ask yourself, how many pundits foresaw the
mess we are in now and anticipated the dramatic easing of oil demand?
Sure, one can gather relevant information and make a reasonable guess as
to oil demand next year and the year after that. But after five years,
the potential paths of demand growth become unwieldy. How will
economic growth be sustained over the next five years? Will the OECD
countries lag emerging countries? Will China and the rest of Asia
power ahead and create substantial demand? If Asian countries do power
ahead and create many millions of middle class citizens, will they demand
their own vehicles and tickets on jet planes to see the world? Will
Brazil and other South American countries enjoy strong economic growth?
Will the Middle East be stable over this period? Will Iraq resume its
full production capabilities? As you see, one can begin asking any number
of questions that are impossible to answer with an accuracy or certainty
and that might have a major bearing on demand or supply or both.
What do we know? We know that for a long time, oil prices were usually
within $20-$30 real per barrel. Now those prices are laughable. No
reasonable person expects the world to return to those prices any time
soon. Many major oil fields around the world are in decline. Oil
companies are searching in more remote and sometimes more unfriendly
regions of the world to develop further existing fields and to discover
new fields. And, the rise of oil prices has given new prominence to some
national oil companies. A sample list, though incomplete, of companies
include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A.
- Petrobras (PBR).
If we were to accept the 1% annual growth of oil demand mentioned in the
WSJ quote for a long duration, what would that mean or imply? A child born
tomorrow will see by her seventieth a doubling of daily world oil
production from about 85 million barrels per day to 170 million barrels
per day. Moreover, during her seventy years, the world will have produced
more during that time than the total cumulative amount prior to her
birth. Call me a skeptic, but I am unable to see where we would find that
much additional oil to produce at such high rates for such a sustained
period.
To be clear, neither the article nor the IEA is suggesting that we endure
a 1% growth forever. Rather, I wanted to use this seemingly small
innocuous number of only 1% growth to draw attention to its implication.
If the long term growth were 2%, then in 35 years the daily world oil
production would double to 170 million barrels per day and the oil
produced during those 35 years would exceed the prior total cumulative
amount of oil produced.
Two excellent sources of information to learn more about oil, oil demand,
oil prices and various policy initiatives, I recommend two sources:
-
Statistical Review of World Energy from BP p.l.c. (BP). I found the link to the
Adobe pdf document toward to the bottom on its homepage.
-
Monthly Oil Market Report from the International Energy Agency. The link
is to the webpage that hosts the document that is released two weeks
after the initial release date. Subscribers receive immediate access
through a different link.
Both documents are extremely helpful. I find the BP document provides
concise information and historical context. The IEA document provides the
agency's latest thinking and forecasts.
As the world struggles to find new sources of oil, there will be dramatic
changes. I have already discussed some questions we should ask ourselves
as we contemplate future oil demand growth. Of course, many more
questions need to be considered. And I have indicated that some national
oil companies have gained strength and prominence with higher oil demand
and prices. As investors, we should also think about what long term oil
demand growth means for oil sands companies such as Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO), and for large
multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).
As demand continues to rise, I am curious what will happen. Will
scientific breakthroughs help? How will the world cope with the
environmental consequences? How will people adapt to possibly much higher
prices? How will countries and regions change because of either having or
lacking domestic oil supplies? If the world does experience higher
prices, what are the implications for global world trade? And do higher
prices imply that people will travel less and have less of an understanding of
other regions? These questions are just a small sample of what investors
should begin considering.
A few years ago, Professor Bartlett gave a compelling lecture,
captured in a series of YouTube videos, to some students at the
University of Colorado. In his lecture, he discussed oil demand growth.
The lecture starts a bit slow; however, when you reach the latter part of
the third video, you'll see how the prior information is relevant to his
discussion on oil. In other words, because they are important, don't skip
the initial video segments and jump to the third. I urge you to watch the
complete video series.
And after you've watched the videos, ask yourself, "What time is it?"
This question will make sense once you've seen the videos.
When I initially saw the WSJ article, I was drawn by the long term
forecasts. My personal bias is that most longer term things in life are
difficult, if not impossible, to forecast with any reasonable degree of
accuracy. Then as I read the article, I saw the 1% growth number, which
by itself seems very innocuous. But if you think about what 1% growth
means over a long and sustained period, you
quickly realize there are going to be changes. Moreover, the world has
already witnessed a significant shift in oil prices over the last decade.
We are no longer in our prior historical norm of $20-$30 per barrel. Some
might argue that we are now in unchartered territory. As part of that
possible unchartered territory, I wanted you to think about some larger
questions. The questions mentioned in this article are just off the top
of my head without much thought. I am sure you can think of many more.
And last, I wanted to draw your attention to Professor Bartlett's
excellent lecture. His lecture will make you think about oil demand (and
others) growth differently. I hope this article causes you to further
your own research.
On Sunday, 18 July 2009, I photographed
Fish Creek in Fish Creek Provincial Park, which is located within
Calgary. And, if you
click on my Flickr profile
link, you will be taken to Flickr where you can see more of my
pictures.
Disclosure: I am long shares in Canadian Oil Sands Trust, Suncor Energy,
and Exxon Mobil as well as long and short puts in Exxon Mobil.
