Export Land Model Revisited

Jim Brown
 
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Jeffrey Brown, originator of the Export Land Model wrote another article this week with Egypt as the focus and proving the ELM is alive and well and predicting trouble ahead.

I am not going to reprint Jeffrey's article in full but I will provide a link at the end of this commentary. Basically the export land model projects the decline in net exports to zero within X period of time after the country's production peaks.

The theory is simple. Countries with excess crude oil production typically have a much higher growth in demand from inside the country. The cheapest energy is the energy you produce yourself. If you don't have to buy it on the open market then the cost of that oil is whatever cost you have in producing it and transporting to the refiners.

Most OPEC countries have crude costs under $20 for their older fields. These costs are rising daily because of the enhanced recovery methods being used to coax the last bit of oil to the surface but it is still much cheaper than deepwater drilling or massive concentrations of horizontal wells.

That $20 oil translates into cheap fuel prices inside the country and many countries even subsidize it to make fuel even cheaper. They recognize the power of cheap energy to power an economy. Therefore the use of this cheap energy expands much more rapidly for a producer country than a consuming country buying oil at $100 on the global markets.

In the export land model Jeffrey plots the point at which the country peaked and the rate of internal consumption growth to project the arrival of zero exports.

As long as producing countries can increase production to match the increase in consumption there is no problem. Once production peaks the corresponding consumption must also peak and then decline at the same rate as production is declining or net exports will decline.

Basically a country producing 2 mbpd and using 1.5 mbpd has 500,000 bpd available for export. If consumption is rising by 150,000 bpd per year (10%) then a peak in production means 150,000 bpd LESS for exports. That assumes production peaked and leveled out at the 2 mbpd forever. Since that has never happened we know that once production peaks it begins a long period of decline.

If we assume a -5% decline rate for our example that would be -100,000 bpd per year. In the first year after a peak there would be a net decline in exports of 250,000 bpd. That is 100K for declining production and -150,000 bpd for continued consumption increases. (This is a hypothetical example for demonstration purposes only.) The next year would see another drop in export capacity of 250,000 bpd and completely eliminate oil available for export. In the real world the percentages would vary but the concept is the same.

Unless the producing country cuts annual consumption by the amount of the production decline the amount of oil available for export will be forced to decline. This is a fact of life. If you have less of something coming from one source and you continue to use it at the same or higher rate then the available surplus of that material to pass on to someone else.

Export Land Model Chart

If demand growth is not just cut to zero but forced to decline by the amount of the decline in production then ZERO net exports will arrive much quicker than expected.

Most analysts look at a country table and say "Country ABC peaked in 2009 with production at 2 mbpd and they are declining at 5% or -100,000 bpd per year." They put that into their master table and sum the columns and arrive at a number for oil production for years into the future. They are NOT taking into account the decline in net exports in excess of the decline in production.

Countries don't really cut fuel consumption. The only proven method to reduce oil consumption is to raise the price of fuel to the point where consumption ends.

It is thought that a rise in gasoline prices by 25 cents in the U.S. will lead to a loss of 600,000 jobs over the next two years. This same problem holds true in every country on the planet. That is why countries subsidize fuel prices in order to stimulate the economy.

With export countries dependent on the revenue from oil exports they have a serious problem ahead. In order to keep the money flowing they will have to reduce demand. Reducing demand is a painful project for those in power. This is especially true when it has to come through pain at the pump. The peak in oil production for that country is also the peak in that country's economy. Everything to follow, either from lower export revenue or higher prices at the pump, a slowing economy is inevitable.

It does not stop with the pain for the producing country. The decreasing exports will push up oil prices globally and produce additional pain at the pump for the consuming nations. Our economies will suffer the same decline as the producing nations because it is a law of nature that higher fuel prices decrease economic growth.

Now project this out over the next ten years and you will see where the global economy is going.

Link to Jeffrey Brown's latest ELM article: LINK

Jim Brown

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