There has been a lot of press about the Export Land Model recently as more and more analysts come to the realization that the key points in the model are true. What is the ELM and how will it impact us?
The Export Land Model was first presented at the ASPO 2007 annual meeting by Jeffrey Brown and Samuel Foucher. There are several key points underlying the model and as more analysts look at the global production data these points are becoming significantly more important.
The short description of the ELM can be explained easily but once you understand the principle it is a short leap of realization to how it will eventually impact global energy use.
The model is built on the basic premise that countries who produce and export oil see their own consumption of oil increase at a much faster rate than those who import oil.
For instance a country like Saudi Arabia derives the majority of its wealth from oil production. Oil is so plentiful and the local cost so cheap it is a prime stimulant to the economy. I reported last week that gasoline was 70-90 cents per gallon in Saudi Arabia. This implied subsidy stimulates economic growth because energy for transportation is cheap. Unlike the U.K. where the equivalent price is $7 per gallon and energy costs are a drag on the economy.
Where energy is cheap the demand for that energy grows faster than in other economies. The business environment is hooked on cheap fuel as a drug to fuel growth.
Secondly the revenue from oil exports funds the government and services that people depend on. It provides a double benefit of high revenue and cheap energy.
This is all well and good as long as the country can continue producing oil at an increasing level. The country budgets for a set amount of revenue from production and citizens run their businesses on the assumption energy will continue to be cheap.
Once oil production begins to decline the problems start to appear. It has been proven over the last 30 years that declining production does NOT slow the rising demand in a producing country. When faced with rising demand for a growing economy and declining production the factor in the equation that changes is the amount of oil exported.
When faced with choking the economy with less energy supply or higher prices to restrain demand the result is civil unrest and recession. Countries rarely favor other nations over their own people so they cut exports.
The combination of the historical high demand growth in producing nations and the peaking production process spells serious grief for global oil. For every million barrels of additional demand inside a producing country there is more than a million barrel decline in exports. The difference is in the 4% on average annual depletion rate.
There are currently 44 countries that are net exporters of oil. There are 173 countries that are net importers of oil. Net exports of ALL CURRENT EXPORTERS are down -5% from their 2005 peak volume.
When energy analysts talk about global production they rarely connect the dots to the growing internal demand in those producing countries. It is very easy to take current production and add the expected output from new projects, subtract depletion and come up with a new production number. Add up all the countries and you have total production. Unfortunately total production is not the same as total exports.
Using the data published in the ELM analysts have found that rising production does not mean rising exports. We can actually have fewer exports even though production may have risen slightly. Since 173 countries are depending on those exports that is the number analysts should be tracking.
With the new emphasis on the ELM that data is finally being calculated and the results are not pretty. In this graphic from George Lordos the chart clearly shows that exports peaked in 2005. Global production has increased but net exports are slowing due to the internal demand growth of producing countries.
Expecting to hear more about this in the future because this has the potential to be the straw that breaks the camel's back. When it gets right down to it the bottom line is "how much oil is actually available for the 173 countries that are net importers?"
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