Population Driven Demand

Jim Brown
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China reported last week that export growth slowed while imports accelerated. One of those accelerating imports was crude oil. The U.S. may be facing slower demand growth but demand from Asian nations is accelerating rapidly.

China imports more than 55% of its crude oil needs. In May these imports amounted to 5.07 million barrels per day and the fifth month in a row over 5.0 million. China may be trying to slow its economic growth but the growth in oil demand is accelerating. Imports of oil products grew by +5.3% over the prior month. China's oil imports are roughly 900,000 barrels per day greater than the same period in 2010. By the time 2011 is over that number will be over one million barrels per day.

China is only one of the rapid growth consumers and they are expected to consume more oil than the U.S. by 2020. The U.S. consumes roughly 21 million barrels per day. India is several years behind China in terms of growth and modernization but they are also growing rapidly.

The world population took 12,000 years from the dawn of "agricultural man" to reach a population of one billion in the late 1800s. When oil was discovered it took several decades to learn how to use it and around 1900 the oil age kicked into high gear. Oil became an extremely cheap energy source capable of making workers far more productive and enabling transportation of more than 30 miles a day as was the common horse drawn capability at the time. The internal combustion engine created a surge in equipment advances like tractors, automated assembly lines, trucks capable of long distances, shipping, etc. By making man more productive and extending his immediate reach not only statewide, nationwide and globally the living standard for humans in developed countries exploded.

Cheap oil and its products like gasoline, kerosene, diesel, etc, changed the way of life on the planet. The population, no longer doomed to work fields or commute to the city by horseback, exploded. Relative prosperity was in abundance. The population beginning with the advent of the true oil age in 1900 has risen 600% in only 110 years. Where it took 12,000 years to grow to the first billion it only took a little over 100 years to grow to nearly seven billion. All of this prosperity that allowed the human race to multiply like rabbits was due to cheap oil.

UN Population Chart

Despite the surge in population more than two thirds of the planet still is not considered a "developed nation" and they are still making the transition into the oil age. Roads are just now being built. Automobiles are just starting to become available at a price they can afford. China is on the leading edge of the mobility revolution but more than one billion people in China still do not have access to an automobile. The same is true with India. Population in those countries as in the rest of Asia, Middle East and Africa is still growing rapidly. Population in the developed countries is said to have leveled off but the USA has grown from 270 million to over 300 million in the last decade. That is better than a 10% increase. At the current rate of global growth the population is increasing by roughly one billion people every 12 years and that time frame is shrinking. The UN is predicting 9.5 billion by 2050 but baring a sudden change in the trend we could be at 9.5 billion well before 2040.

Unfortunately for those unborn people we are rapidly coming to the end of the oil age. I write about this constantly in these pages but the world and the mainstream press has not yet caught on. The Energy Information Administration (EIA), the keeper of energy facts for the USA, has gone from a cornucopian view just a couple years ago to a peakist view but because of political motivations they can't sound the alarm loud enough. The International Energy Association (IEA) has taken the same path of least resistance. The OECD nations pay them millions of dollars to produce political sound bites and headlines that provide cover for those lawmakers and officials just trying to serve out their terms before disaster strikes.

The EIA has changed their view significantly but they continue to avoid the disaster threshold in their forecasts because it is politically expedient for them to do so. President Carter warned everyone to turn down their thermostats, put on extra sweaters and take the bus to work because the energy picture had changed. He was promptly voted out of office. Consumers in developed countries do not want to hear about the coming change in lifestyle. They want lawmakers to just fix it so they can continue their long distance commute and drive an SUV to soccer practice. Fortunately the spread between demand and production has continued thanks to new technology and the ability to drill in deeper water and milk the shale gas reserves for natural gas liquids. Along the way gasoline has gone from 25-cents a gallon in the 1960s to $4 a gallon in 2011. This moderates demand and keeps demand from exceeding supply.

The EIA recently produced a chart showing where production would come from over the next 20 years. Note that beginning in 2012 they have conveniently included an "unidentified projects" category that grows to 43 million barrels per day in 2030. In theory a sufficient number of new discoveries will be made just in the nick of time to fill in that gap. The fallacy there is that any material project takes a minimum of 5-7 years from discovery to initial production. Even worse the types of projects being undertaken today in 6-8,000 feet of water hundreds of miles from shore can take 7-10 years to begin producing. ANY project that would begin producing in the 2012 timeframe as evidenced by this chart would have to have been discovered a minimum of five years ago and therefore would NOT be considered unidentified.

EIA Chart

The IEA studied 800 oil fields and came up with an average depletion rate of 7%. This study was done about three years ago. Current global production is roughly 89 million barrels per day. Using a 7% depletion number (the annual rate at which normal fields decline as existing oil is removed.) that equates to a loss of about 6.2 mbpd every year. This is referenced in the chart above by the declining slope of current oil production.

The IEA continually suggests that there will be enough oil to avoid a shortage as long as enough money is spent in exploration and development. However, in order to make their numbers work for the last two years they have "revised" their expected losses due to depletion in order to avoid mass panic. In 2009 they used a 4.0 mbpd number for depletion. In a recent report they used a 3.0 mbpd number for depletion and that still suggested "tightness" (their word for shortage) by the end of 2012.

The future of the U.S. economy is dependent on the price of oil. In the chart below the recent recessions are plotted along with the price of oil and the resulting GDP. You will note that every time oil prices have spiked a recession immediately followed with GDP plunging. When oil prices rise the standard of living declines for both consumers and businesses. In the chart below the GDP is the black line.

Recession Chart with Oil Prices and GDP

The problem ahead is that the IEA and EIA will no longer be able to conceal the fact that oil demand is rapidly approaching levels where it will exceed oil supply. The population explosion worldwide plus the industrialization and modernization currently underway in China, India and Asia in general is going to suck up any additional supply within the next 12-18 months.

Oil prices are going to continue to rise and that will push fuel prices higher and result in another recession in the U.S. and developed nations. Ironically the developing nations will be able to withstand the higher prices better than countries like the USA. When we get a $1 spike in prices the U.S. consumer shuts down. In China they are happy to get the gasoline at any price because they never had it before.

The U.S. is headed for a fuel price recession in 2012 and it could be a lasting recession. Eventually U.S. demand will be reduced due to price and the current economic structure in the U.S. will suffer greatly. I believe the next president will see unemployment well over 10% and housing prices will plunge even further. There may be one more economic growth spurt towards the end of 2011 and early 2012 but the future is already cast in stone. Global consumers are increasing much faster than global production. There are no magic bullets, no mammoth oil projects suddenly coming online and very little current excess capacity.

You can continue believing technology will save the day but drilling technology takes years to evolve and years to put into practice. Production technology is limited by sheer volume of product to be moved over long distances and at great depths. It takes years to conceive, design, engineer and construct new pipelines and infrastructure projects. We don't have years. We have months before demand exceeds supply and fuel prices exceed consumer ability to pay.

Feel free to email this commentary to everyone you know. Time is growing short.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2013 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?