Why High Oil Prices are Here to Stay

  • Print

On May 3rd I will be delivering a talk called Moving Beyond Oil Dependence as a part of UC Santa Barbara’s Spring 2012 Chemical Engineering Seminar Series. The talk will roughly follow the outline of my book, and I have used several graphics from the book in the presentation.

However, I created a couple of graphics specifically for this presentation that I believe explain the majority of the oil price escalation over the past decade. True, part of the price rise may be due to speculation, but the following two graphics show just how robust demand has been even in the face of $100 oil. The data source for both graphics is the 2011 BP Statistical Review of World Energy:

asia pacific oil demand

Figure 1. Oil demand in Asia Pacific (minus Japan) from 2000 to 2010.

This graphic shows that despite the quadrupling in the price of Brent crude over the decade (and I used Brent crude because it is more representative than West Texas Intermediate of what Asia pays for crude), regional demand in Asia Pacific’s developing countries still grew by 7 million barrels per day. (Demand in Japan — one of Asia Pacific’s developed countries — fell by 1.1 million bpd over the decade).

So when we wonder why gasoline prices haven’t fallen in the U.S. even though U.S. consumption has been declining for several years, that graphic supplies part of the answer. The 1.5 million barrel decline in U.S. demand in the past five years is far less than the demand growth in developing countries, and oil production has not managed to keep pace.

The following graphic shows that this trend is taking place all over the world:

oil consumption 2000 to 2010

Figure 2. Explosive demand growth occurred in every developing region.

So while the developing countries in Asia Pacific saw a nearly 50% increase in consumption — amounting to 7 million barrels — it wasn’t even the fastest growing region. That distinction belongs to the Middle East, which added 56% to their oil consumption between 2000 and 2010. The Middle East’s total increase in consumption was smaller than that of Asia Pacific at just under 3 million barrels per day, but that is primarily a function of the relative populations of the regions. OPEC countries like Saudi Arabia saw the strongest demand growth in the region. This is understandable considering that the high price of oil brought a huge influx of cash into oil exporting countries, and wealthy countries tend to increase their oil consumption.

This is why — even if we take peak oil completely out of the equation — I don’t ever foresee a sustained return to cheap oil. There are many who have placed most of the blame for increased oil prices on speculation, but those two graphics explain why I believe the issue has far more to do with fundamentals.

Source: Consumer Energy Report

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Robert Rapier

Quantcast