Can U.S. Consumers Afford Oil?

Jim Brown
Printer Friendly Version

As demand rises around the world so will the price of crude oil and refined products. However, the USA, even though it is called the richest nation on earth may not be able to afford the higher priced crude.

We already know how higher gasoline prices have put a serious dent in same store sales at places like Wal-Mart and other lower priced retailers. Gasoline prices almost reached $4 three weeks ago, back to $3.84 today, but the damage to the U.S. economy started in early April. We have seen report after report of slowing manufacturing orders, slowing retail orders and slowing consumer purchases. The U.S could actually slip back into recession by Q3 if oil prices don't decline soon.

I would not bet on oil prices declining. We saw this week that Goldman Sachs raised its average price forecast for Brent to $120 for the rest of 2011 and to $140 in 2012. Morgan Stanley raised their forecast to $120 in 2011 and $130 in 2012. JP Morgan expects to see $130 in Q3. All of these forecasts are based on "increasingly tight supplies," declining OPEC spare capacity and declining production in non-OPEC countries.

It would appear that prices for gasoline are going to continue to rise. Back in the late 1970s and early 1980s when prices spiked to the previous highs the U.S. had no real competition for consumption. The USA was the major consumer on the planet by a wide margin. China and India had only a fraction of the vehicles we had and almost no roads on which to drive. They were agrarian societies with camels, oxcarts and bicycles.

China is now producing 20 million cars a year and they have more upper class citizens than we have total population. In prior decades when gasoline prices spiked it was the lower class in the emerging economies that were forced to do without transportation. U.S. consumers paid the higher prices and continued buying homes farther into suburbia and driving longer commutes. The amount of their total paycheck devoted to gasoline was minimal.

That paradigm has changed. The U.S. has 4.5% of the world's population but consumes 22.5% of the world's oil. Over the next decade that will probably shrink to 15%. It will not be because U.S. drivers will suddenly park their cars and jump on the light rail although there will be some that will change their life style in that manner.

China has 19% of the world's population and consumes 10% of the world's oil. The new capitalistic upper class in China is increasing in wealth at a tremendous rate. It is only a matter of time, at 20 million new cars a year, that China's crude demand exceeds that of the USA. Since actual crude production is not going to increase materially and will likely decline rather than increase, that means somebody, somewhere is going to have to go without gasoline so that the upper class in China and have gasoline to fuel their new mobility habit.

The same scenario is happening in India only at a slightly slower rate. India has 17% of the world's population but only consumes 3.6% of the world's oil. Obviously that is going to change dramatically as India's upper class becomes more mobile and India finishes the hundred thousand miles of highways currently under construction.

If China's demand increased from 10% to 15% of the world's production and India increased from 3.6% to 10% by 2020 those would be very reasonable numbers given the speed of their current growth and the number of vehicles they are producing annually.

Unfortunately that means nearly 10 million barrels of oil per day that are currently going somewhere else would be directed to China and India instead. There is ZERO chance of increasing production over that period by more than a couple million barrels per day. The current -7% per year decline rate in the top 800 fields is simply too much for new production rates to overcome.

Analysts believe global production could decline -10% by 2020 because of rapidly rising decline rates AND the beginning of resource hording once nations with minimal production begin to understand that the oil they have in the ground is all the oil they are going to be able to afford in the decades to come.

How will that 10% of existing production be directed to India and China? By price rationing. As oil and gas prices rise the number of people in the USA that can afford $5, $6 even $8 gasoline is going to shrink rapidly. If Wal-Mart is posting a -1.2% decline in same store sales because gasoline prices averaged $3.70 in April how much will sales decline when gasoline is double that in 2013 and beyond?

The blue collar working (commuting) class in the U.S. is going to be in complete shock. There is going to be such a dramatic change in driving habits in America it is inconceivable. Unemployment is going to rocket higher simply because workers will no longer be able to drive to work. Employers will have such a decline in business they will be laying people off by the tens of thousands.

I did not even discuss the +10% increase in population by 2020. The global population will increase by 700 million by the end of the decade. Obviously babies don't consume much oil but the +950 million that were born since 1995 will be coming of age and entering the working, driving, commuting world. Anybody with a computer and access to Google and a calculator will quickly understand that the standard of living in the U.S. is about to change dramatically.

If you are not invested in oil stocks over the next decade you are going to find your net worth decline significantly. If you own real estate that will be impacted by the end of the commuter era then now is the time to sell it. Cash will be king by 2015 and investments in oil stocks are going to be the only investment worthwhile once the fuel price recession begins in 2012.

Forward this email to everyone you know! They will thank you for it.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?