For 2010, the year just ended, the IEA estimates that global crude oil and natural gas liquids demand was around 87.8 million barrels a day — an incredible 2.8 million barrel per day increase from year earlier levels, one of the largest increases in consumption in several decades! China alone added almost one million barrels per day to its daily petroleum demand. The increase was almost double what the IEA originally forecast.
Crude oil demand forecasts for 2011
For 2011 the International Energy Agency raised their global crude oil demand forecasts last month. Worldwide oil demand is forecast to rise by 1.5 million barrels a day (or 1.6%) to a record – and stunning – 89.1 million barrels a day in 2011.
Preliminary data for 2010 indicate that total U.S. consumption of petroleum and non-petroleum liquid fuels increased by 1.9 percent. The major sources of consumption growth were distillate fuel oil (diesel fuel and heating oil) which grew by 3.7 percent and motor gasoline which increased by 0.7 percent. Projected total U.S. liquid fuels consumption are expected to grow further in 2011, with gasoline and distillate fuel expected to account for much of the growth in consumption.
Year after year global demand increases of one to three million barrels per day will challenge the ability of the energy industry to increase supply. The amount of excess global productive capacity available to meet demand increases is a hotly debated issue. Because excess productive capacity is kept confidential by exporting government officials the level can only be estimated.
Peak Oil Debate
We think the debate over ‘peak oil’ – the question as to whether crude oil production has reached its’ ultimate high – misses a main economic point. If global oil demand is rising one to two percent per year as economies expand and more individuals adopt the ‘Western middle class lifestyle’ – and if natural depletion from oil fields result in production declining 5% a year or more – the real question should be: Can exploration and production activities can keep oil supplies growing fast enough to meet demand?
The clear answer, to us anyway, is ‘no’ at the current price and under the current regulatory environment. Add in the fact that roughly 75% of the world’s crude oil reserves are owned by national oil companies (who have no incentive to maximize production) and it would be difficult to argue otherwise. Gregor.com published an excellent chart last month illustrating the problem – stagnant global crude oil production for over six years, a period that included some very attractive prices for commodity producers.
Morgan Stanley Report
Addressing the state of the global oil market Morgan Stanley released a forecast last month that global oil demand would reach a record in 2011. Their conclusion was that oil prices need to remain higher—or increase from current levels—to ration demand.
The most interesting chart in the report deals with spare global pumping capacity – the excess supplies available to meet any increases in demand or supply interruptions. When spare capacity drops toward the 2 million barrel per day level crude oil price volatility increases, sometimes violently.
Examining the Morgan Stanley projection of spare capacity it is apparent that much higher prices will be necessary in the years ahead if their call is correct (we think it is, although we think they are overestimating current global spare capacity). The chart in a word can be described as “shocking” – and it will be to the world economy and oil prices, in our opinion sooner rather than later.
This chart has more importance now than when the report was issued due to the fact that we might see interruptions in crude oil supply due to the ongoing Middle East turmoil, an unlikely but none-the-less not impossible occurrence.
China’s Oil Demand
Platts reported that China's oil demand rose 11.4% year over year to a record 8.7 million b/d in 2010. Some analysts expect China's oil demand to increase to an average 9.5 million b/d in 2011 – an increase of 9% - as the Chinese economy continues to expand and the consumption of transportation fuels increases. "The last two months when China has hit oil demand records are proof in point of the country's apparent insatiable appetite for oil and transport fuel," according to Platt’s Tom Hogue.
Using slightly different methodology the International Energy Agency’s data also indicated that China has reached record demand levels in 2010. Coal supply issues due to mine flooding in Australia has resulted in fuel substitution.
Large-scale diesel-powered generators are being used to supplement coal fired generators in impacted areas. In addition, local governments closed coal-fired power plants and rationed electricity to meet centrally imposed energy-saving targets further driving the demand for diesel generators.
Forecasts are that China’s economy will expand 9.1 percent in 2011 according to estimates collected by Bloomberg. Gross domestic product grew 10.3 percent in 2010. Bloomberg reported that China’s economy grew at a rate of 9.8 percent in the fourth quarter. An expanding economy will need more energy – coal, oil, and natural gas.
Some experts claim China may face a diesel shortage in 2011 as refining capacity lags behind the expected increase in consumption. Diesel demand may rise 6.2 percent in 2011 according to the experts.
China’s overall power generation climbed 13 percent in 2010 – and most of the increase was from coal-fired units. The increased power generation is bullish for the coal market. The large scale use of diesel generators is also bullish for the oil market.
Last, it was announced that China will spend an average of 500 million yuan each year exploring, developing, and acquiring oil and gas resources over the next two decades. The effort is being undertaken to counter the country's growing dependence on imported energy.
To get a feel for the magnitude of the increase note that the country invested roughly 50 million yuan per year on these activities from 1999 to 2010. So they expect to see a ten-fold increase in activity each year for twenty years – talk about a market niche with growth potential!
The increased activity will include merger and acquisition deals in the energy sector – coal and crude oil being the focus. Combined with merger and acquisition activity globally, this intensified interest should be a positive development for companies in the energy and mining sectors. Charts courtesy Financial Times.