Is There Something Wrong with the Crude Oil Market?

The dependence of the IEA’s forecast on continued rapid growth in China’s oil consumption is a hidden risk. Friday’s oil demand release by China confirms that possibility. China is known for its opaque economic statistics, creating a cottage industry of “China economy watchers.” So far, China’s aggressive economic stimulus plan in response to the global financial and economic crisis has succeeded, at least as measured by the reported statistics, but some of the economic measures of this success reflect money allocated but not actually spent. Also, China still has to deal with its structural economic issues — the lack of strong domestic consumption growth and the conflicts among regional, local and national government agency investment objectives.
At the 30,000-ft. level, the sheer size of China’s population and economy should dictate growing energy demand. In earlier periods the pace of China’s demand growth would not have been a major concern since oil consumption all across the world was growing. But now the growth of oil consumption in the developed economies in the world is no longer assured, and with global warming and aging demographic issues confronting these economies, we may actually be experiencing the start of a new era to be marked by lower oil consumption for a significant portion of the world’s economies.

If a new oil consumption era is dawning, then the rate of oil consumption growth in the future may be lower than we have experienced in the past. As the accompanying chart shows, for the period 1966-1979, the world’s oil demand growth averaged 2.4 mmb/d annually. If we exclude the recessionary period of the early 1980s when global oil demand was negative, world oil demand grew at about a 1.06 mmb/d rate through 2008. On the other hand, if we include those weak demand years, consumption grew at only 0.69 mmb/d a year. It is interesting to note that if we include the revised IEA annual demand growth projections for 2009 and 2010, the 1984-2010 rate becomes 0.964 mmb/d, some 96,000 b/d lower than the rate experienced through 2008. The 1980-2010 growth rate of 0.63 mmb/d, however, is only 60,000 b/d lower than the 1980-2008 rate.

Will we be looking at an even lower demand growth rate in the future? Only time will tell. For the world’s oil market, slower demand growth may be perceived as a relief valve from pending peak oil concerns. While slower demand growth will take some pressure off the supply challenge, aging oil fields and accelerating depletion rates remain a relentless cancer in the industry. The recent media flap over comments by Fatih Birol, chief economist at the IEA, about a peak in global oil production coming much sooner in time than the agency has publicly acknowledged may be the tip of the iceberg highlighting that depletion has displaced growth as the principal driver for the global oil business. While finding new fields will remain important, the oil industry’s focus increasingly will be on the critical issue of how to get more from existing reservoirs and how best to extract the lower quality unconventional oil resources around the world. This sounds like a good environment for the oilfield service industry.

Rigzone