Oil Demand is Quietly Growing

Jim Brown
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If you watch all the headlines crossing the wires it would appear that oil demand is still dropping due to recession hangover. Refineries are shutting down or being mothballed and inventories continue to rise. It looks on the surface like an impossible set of circumstances where populations grow but demand does not.

Obviously that surface view is what most Americans see on the nightly news or read in the paper. Gasoline prices are falling, refineries are shutting down either temporarily or in some cases permanently because there is not enough demand to keep margins profitable. Peak deniers are jumping with joy over the apparently rising supply.

Unfortunately appearances are deceiving. Demand in the U.S. is down because 25 million people are out of work and much of our manufacturing capacity has been stopped while the country waits for the recovery to gain some traction. American factories consume huge amounts of natural gas and large amounts of oil products when they are in full production. With most only running one shift today instead of round the clock operations the demand for crude products has fallen more than two million barrels per day from the 2008 highs. This is only temporary and once the economy ramps up again that demand will come right back.

Vehicles sales in the U.S. are running at a 10.8 million unit pace for 2010. This is well below the 16+ million pace of 2008. That is a deficit of more than five million cars per year. Even at an average of 20 mpg and a tame 100 miles per week those five million cars will consume 25 million gallons of gasoline per week when production reaches those levels again. It will happen just as sure as night follows day.

The population in America is currently 308.7 million and growing by nearly 6,650 per day or 2.4 million per year. That is a drop in the bucket compared to the world population at 6.8 billion today and climbing by six million per month, +72 million per year. Everyone of those souls is a consumer of oil in varying amounts. Granted anyone born today is not going to become a voracious consumer for about 10 years but their rate of consumption will rocket higher starting on their 11th birthday and it will last for the next sixty years of their life. Those born 10 years ago are hitting that stride now and every day another 200,000 people reach that threshold. Until world populations flatten or decline the demand for oil products will continue to grow. I doubt that will happen in our lifetime without a world war, massive pandemic or earth-shaking cataclysm.

In 2009 China sold more cars than the U.S. and that was not supposed to happen until 2020. If China continues at its current pace it will be consuming more oil than the U.S. The U.S. consumes 21 mbpd and China consumed less than 9 mbpd in 2009. Their oil demand growth is between 5.7% and 8% per year and rising. China is expected to go from their current 50 million cars to more than 200 million cars by 2020. We know from experience that more cars produce more car envy and the desire by even more people to own a car. A car in China is a status symbol just like it was in America in the 50s and 60s. It is the ability to go anywhere at any time and China's masses are developing that auto envy.

China has 1.3 billion people and growing rapidly. With only 50 million vehicles that is one vehicle for every 260 people. Even if China does succeed in growing to 200 million cars on the road by 2020 it will still only be one car for every 70 people with a population of 1.4 billion in 2020.

Factor in India and the rest of the developing nations and there is no way demand is going to remain low. The IEA predicted this month that oil demand will grow by 1.4 mbpd to 86.3 mbpd in 2010. That is +1.7% higher than 2009 and reverses the drop from the prior two years. Most economists believe that the recovery will be in full swing by early 2011. If that is the case the demand for oil should rise even faster than the +1.7% rebound in 2010. Most analysts expect another +1.9% to +2.1% increased in demand in 2011. That means demand will grow to more than 88 mbpd in 2011.

Most geologists today will tell you that pumping 90 mbpd is going to be a problem and may never happen despite the expected gains in Iraq and Brazil. Depletion never sleeps and depletion is not impacted by recessions, depressions or inflation. It is as steady as the second hand on a clock.

Saudi Arabia is thought to be producing 8 mbpd today. They are also thought to have 4 mbpd in excess capacity today. Even though they are not using that excess capacity today they have to continually invest in developing new production because existing production declines every month. Eight mpbd in production today might decline to 7.95 next month, 7.85 mbpd three months from now. Production capacity must be continually increased just to remain level.

Over the last two years many development projects were cancelled or postponed. These are the projects that would have added to existing production to keep it level. Now that prices have rebounded those projects are starting to be put back on the schedule but completion dates are now 2-3 years farther out into the future.

Meanwhile countries that produce oil are using excess capacity to stimulate their own economies. Almost every major producing country is seeing their own demand move sharply higher. Saudi Arabia for example consumes 1.5 mbpd just removing salt from seawater in order to provide drinking water for their people. Their oil demand has risen over 10% over the last three years. Kuwait has seen their demand rise. So has Nigeria, Brazil, Russia and Mexico.

Mexico is expecting another big decline in overall production in 2010 but a +4% increase in the amount of oil they consume.

Demand is rising but it is not obvious to the casual observer. It should be obvious to those that follow oil on a daily basis because compliance with the OPEC production cuts is down to less than 58%. That means more than 2 mbpd of oil that is supposed to be on hold is finding its way to market and the prices are holding over $74 per barrel. If that oil was slowly building up in global inventories the prices would be falling instead of rising. It is entirely conceivable that when the time comes for OPEC to start producing at full capacity again, we will find out that they have been producing at capacity for many months and that capacity was not as high as expected because of continuing depletion and rising consumption inside the producer country.

The apparent lack of demand that makes the headlines every day is deceiving people into thinking that we have crossed over a demand plateau and because of our improving technology and higher mpg cars demand will continue decreasing. This is the farthest thing from the truth. The world is in for a major surprise over the next 18-24 months.

Jim Brown