Suburbia is Toast.
Oil prices pushed near the top of their recent range this week, and the usual suspects trotted out on the TV to tell us why this rally couldn't last. And on the face of it, their argument seems to make sense. It boils down to ...
1. Crude has been trapped in the same range since June. 2. U.S. oil demand is lackluster at best. 3. There is plenty of oil in storage.
So why, then, are oil prices trending higher?
Force #1: Global Demand Is Rising
To be sure, America is using less oil. The Energy Information Administration expects America's oil demand to fall by 330,000 barrels per day (bpd) in the fourth quarter from a year earlier. And oil refiners including Valero and Sunoco have shut plants to cope with a glut of fuel.
However, all gluts end. The EIA recently revised upward its estimate for U.S. oil consumption in 2010, expecting demand to increase by 320,000 bpd over 2009.
And demand is recovering faster elsewhere in the world. In fact, the International Energy Agency expects global oil demand to rise to 86.1 million bpd in 2010 from 84.6 million bpd in 2009.
And in its October Monthly Oil Market Report, OPEC jacked up its estimate of global oil demand for next year."The risks to the forecast are seen on the upside," OPEC said in a statement."Should the U.S. continue to show healthier oil demand levels, then world oil demand could increase by another 200,000 barrels per day before year's end."
OPEC expects the emerging markets will run rings around developed countries when it comes to oil demand growth. And international experts agree that there's one country in particular that will likely use a LOT more oil ...
Force #2: China Is Shifting Into Higher Gear
China's oil consumption doubled in the last decade, rising to 8 million barrels a day last year from 4.2 million barrels in 1998, according to BP Plc's Statistical Review. And that trend continues.
Chinese oil demand was revised upward to 8.17 million bpd for 2009 from a previous estimate of 8.08 million bpd, according to the International Energy Agency. Crude oil imports in January-August period went up 7.4% from earlier. And demand is accelerating. China's oil imports rose 18% in August.
Looking at next year, China's crude consumption is expected to increase 1.4 million barrels per day to 86.1 million, according to the IEA.
Even these raised estimates may not be high enough. China's car sales are booming — up 78% in September from a year earlier. Overall vehicle sales totaled 1.33 million units, while passenger car sales climbed 84% to 1.02 million units, the China Association of Automobile Manufacturers reported.
So far this year, China has seen 9.66 million cars sold — far ahead of the U.S., which has seen auto sales of 7.85 million. What's more, most cars sold in China are first-time owners. In the U.S., most car sales are replacement vehicles.
So, those revved-up China auto sales mean much higher gasoline consumption and oil consumption.
Force #3: The Cheap Oil Is Going ... Going ...
Peak production is already receding in the rear view mirror for dozens of nations. World reserves are being depleted by about 4% a year, according to the Association for the Study of Peak Oil. That leaves the world margin of error far too small, and vulnerable to disruptions such as rebel attacks on pipelines or saber-rattling disputes in the Middle East.
As reserves of cheap oil run lower, competition for remaining assets becomes more frenzied. The global financial crisis barely slowed China down in its quest to outbid western oil companies for global assets. For example, ExxonMobil recently made a $4 billion offer for Ghana's Jubilee oil field. But then China National Oil Company opened its own talks with Ghana to make a rival bid for a stake in Jubilee.
The Jubilee field is estimated to hold 1.8 billion barrels of oil. According to the Energy Information Administration, the world's 15 largest oil producers delivered about 64 billion barrels per day in 2008.
Exxon's $4 billion bid would buy it a 23.5% stake in the Jubilee. According to some experts, oil would have to sell at $100 a barrel to make this stake profitable for Exxon.
Deflationists — people who argue that the big trend in prices going forward will be down, not up — would argue paying that kind of price for oil is just crazy! So how crazy is it that China is willing to trump that bid? How high of an oil price is China planning on?
And Ghana is just the beginning. Chinese oil companies have announced plans to spend at least $16 billion to gain access to African energy assets.
Meanwhile, the big American oil companies, outbid by foreign competitors with deep pockets, are facing a future of steadily dwindling production. Let's keep the focus on ExxonMobil. It has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade.
Many oil companies are running up against the limits of growth. This is something that is affecting the entire Western oil industry, and will probably eventually spark a resource war in the Arctic, as the U.S., Canada, Russia and other countries fight over oil and gas resources literally at the end of the Earth.
Like I said, suburbia -- that car-depenent extravaganza of the post-war era -- may end up looking like the worst misallocation of resources in American history.
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Allan Walstad - 10/19/2009
"the world's 15 largest oil producers delivered about 64 billion barrels per day in 2008."
My eyes popped out for a second before I realized you meant 64 million.