Thoughts on the Current Restructuring of Global Oil Demand

The global financial crisis may be hastening a process that’s been underway the entire decade: the restructuring of global oil demand. Western OECD oil demand has been much slower the past 15 years and its growth rate started to stall out again as early as 2004. The more spectacular leg of the advance in the price of oil was therefore built in large part on non-OECD demand. Of course. While this looks like a tidy and easy-to-read set of circumstances, however, it’s actually a bit more complicated than merely splitting the world in two.

Now, at the risk of wading into an imperfect or confining analogy, I want readers to recall the leapfrog phenomenon that so aptly characterized the first uptake of mobile phones in the developing world. Instead of building out switching stations and miles of telephone poles, companies built towers–and then sold handsets. Users were then able to get a piece of the miracle of telephony, without having to bear so much of the cost for the old installed base of wires and buildings. Today, this structurally different relationship to airtime is now being replicated in the way a new user of oil comes online, in the developing world.

What we see therefore is that the way in which oil is still used in Western OECD nations tends to recapitulate, each day, the entire history of the oil age. In other words, we are burdened in the West by the legacy of Plenty. Whereas the new user of oil in the world is liberated by the more recent age of oil Scarcity. In the West we carry on amidst the old architecture of superhighways, long commutes, and two car families. We are the rotary telephone users in a new age of oil, lugging around heavy black handsets and losing contact when wires are felled during storms. In the developing world, meanwhile, a single gallon of petrol is a life-changer when poured into any high-mileage vehicle. The developing world is marked by enormous populations in densely packed mega cities. Adding just 50 miles a week of motorized commuting to an individual’s or a family’s lifestyle here is nothing less than transformational.

What’s exciting, and what’s also rather daunting, about this transformation is that I don’t think the world en masse really understands this new line of demarcation. Instead, the intellectual West continues to either navel-gaze about its own vulnerability in this new world of oil scarcity -or- it monolithically projects this predicament when trying to understand the developing world. As a result, the West neither sees its deeply embedded leverage to the price of oil, nor the rest of the world’s emerging ability to take just a piece of oil’s concentrated power. A little oil goes a long way.

So what we are faced with here are two very different topographies, of oil demand. In the West the individual remains very exposed, very leveraged to oil in a kind of vertical structure. Changes in the price of oil, especially above 100 dollars a barrel, exert tremendous pressure on his lifestyle. But in the developing world, the topography of oil use is flatter. The new Tata car (TTM), which I only use as a recent example of the kind of organic response Asia has made in motorized transport, will likely get 60 miles to the gallon. Does it really matter if petrol is 4.00 USD or 8.00 USD per gallon, if you have raised your lifestyle enough to commute 4-5 miles a day by car? No, it does not. And therein lies the opportunity for the individual, but a new problem for the world.

The problem is that the developing world is where all the people are. In addition, it’s the topography where all the new oil users are. And in that world, the horse-power and man-power equivalents to a barrel of oil’s 5.8 million BTU are nowhere near to alignment. Here, men are undervalued to the price of oil–in a world where oil remains undervalued. The tipping point has come. What this portion of humanity will prove to the world is that the miracle energy substance known as oil contains so much concentrated power, that they will both be willing and able in the aggregate to take the price of oil to its final destination.

This post is available in .pdf version. Click here: The Restructuring of Global Oil Demand

Comments

[Jasper M:]

Thought provoking article. Though the omission of any mention of the concealed costs of low consumption vehicles (less weight = less steel = less safety) is telling.
Oil is likely to be all over the place this year. High over $70/barrel, low probably under $20, once the equity rally sputters out.

Apr 25 04:11 PM

[huskerbob:]

Wonderful article!
Jasper, the people who are moving up to a Tata are probably much safer than they were on a scooter.
Also, would the safety aspect of the switch to low consumption vehicles factor in lower consumption?
Less weight = less steel = less dependence on oil prices, lower cost of ownership, more discretionary income, more money = longer life.
Poverty is the #1 factor for reduced lifespan.

Apr 25 04:24 PM

[walleke:]

Verrrrry Interrrrresting. The author is bullish on oil. Our great problem is the architecture of our cities which are unnaturally sprawled out due to early gov't interference due to the Interstate Highway System and the Rural Electrifical Project.

Apr 25 05:52 PM

[Dirk McCoy:]

You're absolutely right that the expanding energy usage of the emerging economies will follow a different path than here in the US- I take from your article that this technology difference will spur on wider adoption, less sensitive to oil prices.

I'm not so sure that the average Chinese or Indian will want to replace their vanpool commute with driving their own vehicle, however- and just like Americans have adopted wireless technology, it's also possible that Americans may adopt smaller, more efficient, vehicles.

And if something like the MDI aircar takes off here, OPEC may be pining for the days when they could sell oil for $80/barrel.

Apr 25 06:17 PM

[nobby73:]

It's a very interesting article, thanks. I would posit that the transformational leap would be not for everyone to own a car, but to develop a first rate public transport system which would make sense in densely packed urban areas.

As you say,

"The developing world is marked by enormous populations in densely packed mega cities. Adding just 50 miles a week of motorized commuting to an individual’s or a family’s lifestyle here is nothing less than transformational."

My experience if the developing world has been that the average vehicle speed in many cities is a few miles per hour most of the time, so the biggest change will be they will spend a lot of time sitting in their vehicles sweating, or wasting fuel on the aircon if they are lucky, so the 60mpg is a hypothetical not the reality. Owning a car is an aspirational thing - sure a Nano is great and a step up from a scooter, but if they can, they will want something bigger and faster to show their status.

The big issue with these countries is building the infrastructure - new roads, power lines, power stations to support the expected development.

The other point I was always told was that rising oil prices had a greater impact on developing economies as the wages were lower and fuel costs were a higher proportion of total costs.

Apr 25 07:08 PM

[solbro:]

The electric car and other efforts to change the west's dependence on oil may (partly) offset the developing nation's demand growth. Very interesting times.

Apr 25 07:56 PM

[Jasper M:]

Husker: Touche', good point about the scooter.
BUT the author seemed to be comparing 'life with tiny car' vs. 'life with No personal transport'.
The notion that poverty = greatest threat to life may not apply when compared to those whose prosperity comes at the cost of suddenly being at risk on a poorly designed road, around lots of other inexperienced drivers. Ever been to Italy? Brazil? Bolivia? If I remember correctly, car accidents are still the largest cause of accidental death here in the US.
Not that I have a problem with poor folks getting a car. Just don't think the Tata is the ultimate font of all goodness.

Apr 25 08:42 PM

[MBA "Stud"ent:]

First the majority of Americans will only buy small cars when they are forced to by high gas prices. Americans prefer bigger cars so to change that preference there must be a cost that wasn't there in the past. Americans will adapt, just don't expect it to happen until they are forced.

One thing the author doesn't talk about is the value of the dollar. The crisis has strengthened the dollar but when growth begins again, the dollar will start falling again. Oil is priced in US dollars so when the US dollar weakens, oil prices go up and Americans lose purchasing power..

I think oil below $35 is out of the question. The costs to get oil out of the ground have increased too much.

Apr 25 09:36 PM

[huskerbob:]

Jasper - you are probably right that increased auto ownership = increased deathrate. But couldn't widespread adoption of more efficient cars lead to overall increased lifespan and fewer health problems through a reduction in pollution? The two stroke scooters and pedicabs so popular in developing nations are pollution machines.
And to nobby - you are 100% correct about public transportation. Sadly, it is an uphill battle. In the past, there were too many corporate interests aligned against efficient public transportation. Hopefully the weakening influence of automakers will remove one hurdle. Public support seems to be growing as well.

Apr 25 10:11 PM

[ozzy43:]

The problem I see with the article is it restricts itself to addressing cars and commuting. That's only a small slice of the oil pie. Industries in the developing world will be using as much oil as those same industrial systems do in the developed world. If you're manufacturing semiconductors or plastics in China or Schaumberg, your fossil fuel usage will not differ materially.

So you may be right that one sizable (but far less than a majority) fraction of oil consumption - that concerned with individual drivers and non-commercial vehicles - could probably be somewhat smaller in the developing nations, that seems likely to have a less-than-dramatic impact on the overall oil consumption picture once you factor in all of the other fractions.

Apr 25 10:57 PM

[indomason:]

I second nobby73's counter arguments. At first read the author's conclusions looked compelling but then many of his assumptions turn out faulty on a thoughtful reality check.

I have first hand experience in using Oil in both worlds. When I drove a scooter I used to fill up just enough to get by to college and be back without having to hand tow the scooter to a petrol pump (Gas station). In the US I don't recall filling less than a tankful regardless of the price swaying between $1 and $4+. Not that I don't feel the pain at $4, but at both prices it feels nothing compared to the way it used to hurt on the other side of the ocean!

To top that the added congestion the Tata car will bring without matching infrastructure will effectively make Nano transformational only in symbolic terms. Further, unlike the West, the global price changes in Oil are often absorbed by the government on both sides of price changes so the effect is more on Forex reserves than stimulus to public oil use.

But if we take out the Tata car from the equation, and recognize that the bulk of developing world commutes by public transport and then reconsider the author's point around leverage it does hold some strength.


On Apr 25 07:08 PM nobby73 wrote:

> It's a very interesting article, thanks. I would posit that the
> transformational leap would be not for everyone to own a car, but
> to develop a first rate public transport system which would make
> sense in densely packed urban areas.
>
> As you say,
>
> "The developing world is marked by enormous populations in densely
> packed mega cities. Adding just 50 miles a week of motorized commuting
> to an individual’s or a family’s lifestyle here is nothing less than
> transformational."
>
> My experience if the developing world has been that the average vehicle
> speed in many cities is a few miles per hour most of the time, so
> the biggest change will be they will spend a lot of time sitting
> in their vehicles sweating, or wasting fuel on the aircon if they
> are lucky, so the 60mpg is a hypothetical not the reality. Owning
> a car is an aspirational thing - sure a Nano is great and a step
> up from a scooter, but if they can, they will want something bigger
> and faster to show their status.
>
> The big issue with these countries is building the infrastructure
> - new roads, power lines, power stations to support the expected
> development.
>
> The other point I was always told was that rising oil prices had
> a greater impact on developing economies as the wages were lower
> and fuel costs were a higher proportion of total costs.

Apr 25 11:06 PM

[freefall51:]

I wonder if somebody won't finally come up with a car that runs on a Stirling motor without a drop of gas. That would be a game changer.

Apr 26 01:45 AM

[THC:]

Excellent, eye-opening article!!!!!

Apr 26 08:44 AM

[elliot_mllr:]

The real issue is the incremental use of raw materials (iron ore, coal, aluminum) to make Tata cars rather than motor scooters and the incremental use of petrol to fuel Tata cars rather than motor scooters.


On Apr 25 04:24 PM huskerbob wrote:

> Wonderful article!
> Jasper, the people who are moving up to a Tata are probably much
> safer than they were on a scooter.
> Also, would the safety aspect of the switch to low consumption vehicles
> factor in lower consumption?
> Less weight = less steel = less dependence on oil prices, lower cost
> of ownership, more discretionary income, more money = longer life.
>
> Poverty is the #1 factor for reduced lifespan.

Apr 26 10:04 AM

[Old Trader:]

Ozzy,

You're quite correct, imo, about transportation being a relatively small part of the puzzle, but on the other hand, its easier to add a solar panel array/wind turbine on a factory rooftop than to do the same with a car. I wouldn't be surprised to see the amount of oil used for transport to rise somewhat, over time, as a percentage of use. I admit I might be wrong, depending on advances in technology.


On Apr 25 10:57 PM ozzy43 wrote:

> The problem I see with the article is it restricts itself to addressing
> cars and commuting. That's only a small slice of the oil pie. Industries
> in the developing world will be using as much oil as those same industrial
> systems do in the developed world. If you're manufacturing semiconductors
> or plastics in China or Schaumberg, your fossil fuel usage will not
> differ materially.
>
> So you may be right that one sizable (but far less than a majority)
> fraction of oil consumption - that concerned with individual drivers
> and non-commercial vehicles - could probably be somewhat smaller
> in the developing nations, that seems likely to have a less-than-dramatic
> impact on the overall oil consumption picture once you factor in
> all of the other fractions.

Apr 26 10:08 AM

[erniem:]

I wonder if the author understands the concept of "middle class". A great part of the world population has been raised to that level, however it is defined by an income that would be considered poverty stricken in the US. $15 a day raises you to middle class in most of the world. The people buying Tatas are going to be stretching and scrimping at extremes to pay off the $2000, and yes the cost of gas, and oil, and grease, and infrastructure funded by taxes that is needed to support the roads will matter. A man who makes $15 a day and needs 50 cents of that for gasoline is no different than a man who makes $100 a day and needs $10 a day for gasoline. (figuring the man who makes $100 a day is driving a car that gets a third the mileage of the Tata. And that is for a short trip. For a long trip his costs will be $20 daily and bridge tolls, etc)

Apr 26 11:02 AM

[billp37:]

"a barrel of oil’s 5.8 million BTU" is another of Macdonald's statements of the importance of heat in generating energy.

We're suspicious, from reading some Internet posts, that solar and wind don't have enough BTUs IN to make much of a practical difference.

Important post may be

"fast neutron
Santa Fe, NM
January 12, 2009

From actual experience, wind farms produce 1.2 watts per square meter. Solar Thermal and Photovoltaic methods capture 5 to 6 watts per square meter. There is no economy of size in either technology. Dividing the watts you need by those values gives the land area in square meters needed to produce the juice. The numbers are astronomical "

www.topix.net/forum/so...

Another is

"Chairman, President and CEO Questar Corporation Keith O. Rattie said on April 2, 2009

Why did my generation fail to develop wind and solar? Because our energy choices are ruthlessly ruled, not by political judgments, but by the immutable laws of thermodynamics. In engineer-speak, turning diffused sources of energy such as photons in sunlight or the kinetic energy in wind requires massive investment to concentrate that energy into a form that's usable on any meaningful scale. "

So we are pursuing study, on Internet, of BTUs IN for comparison to claims of electric energy OUT [1 kWh = 3412.14163 BTU] for various technologies.

Reasons include:

"Solar Array is the fourth solar manufacturing venture planned, under construction or operating in New Mexico, joining Schott Solar, Advent Solar and Signet Solar."

"TEMPE, Ariz., Mar 24, 2009 (BUSINESS WIRE)

The agreement, which represents the largest PV contract by an electric cooperative in the U.S., calls for First Solar to engineer, procure and construct (EPC: undefined, undefined, undefined%) a 30 megawatt AC (MW: 14.92, -0.7, -4.48%) ground-mounted PV power plant in northeastern New Mexico. "

We are also looking at BTUs OUT for fusion energy.

"A megaton of TNT or megatonne of TNT is a unit of energy equal to 10^15 calories, also known (infrequently) as a petacalorie, equal to about 4.184 petajoules."

Fired Los Alamos physicist Dr Pedro Leonardo Mascheroni gave me a lecture some years ago at the University of New Mexico library on his ideas for sucessful fusion electric energy. In his words, a stronger match is required to ignite fusion.

Fusion works

www.prosefights.org/nm...

in some applications.

Apr 26 11:11 AM

[IndyRN:]

YAWN! I wouldn't trade my standard of living with the "developing" world. We in the west will adapt just like we always have. It won't be easy with the Big Oil elephant on our back but we WILL adapt and make it a positive situation. And the standards of living will remain the same.

Apr 26 02:24 PM

[galewhitaker:]

To Dirk Mc Coy and others who think that air or electric cars are going to save our bacon anytime soon: There are currently 250,000,000 gas guzzling cars on the roads in the US. It will take many years for cars powered by new technology to make a dent in their oil consumption. In the mean time a billion folks in Asia, Africa, and South America are going to be pouring gasoline down the throats of their new Tatas. The idea of everyone in the world motoring to work in their gas powered cars is so short sighted and so stupid it defies imagination.

Apr 26 03:59 PM

[Dirk McCoy:]

Gale,

We certainly won't change out every gas car for air cars over the next 10 or 20 years- just as there are still propeller airplanes, console televisions, and phonographs, there will still be lots of gas cars. And the technology may not pan out.

But are you honestly telling me you (and everyone you know) wouldn't consider buying the vehicle currently advertised at zeropollutionmotors.us... if it comes to fruition for under $20K as projected? 6 passengers, 800 mile range, on an 8 gallon tank of gas?

It didn't take too long for billions of people to adopt cell phones, so change isn't the issue. And if you consider how many houses were built the last 10 years, do you think capacity is?

Trust me- there will be lots of oil left to rot in the ground.

Apr 26 04:26 PM

[HardwoodFlo...:]

Great Article- well articulated....

Those people who propose "chaos theories" and make stupid comments like "the driving season is here" are the same ones who propogate the ideas of "world wide demand on oil" and the rest. I'm not saying things might get sticky 10 years from now but in the mean time inventories are thru the roof and there is more to come there are tankers sitting out on the ocean bought in the "contango" that still have to hit the refiners. The whole thing is a joke.

The whole "leverage" or margin option in the commodities market was designed for people that actually purchased and use the products in the market (e.g. refiners, millers etc). The problem with the current system is that to little risk is associated. You have to look at it the way the LBO guys on wall Street look at these propositions: what is the down side risk. Well if you only have to risk 10% to make a gamble how great is the risk? I think the margin requirements should be raised.

The idea that oil inventories are at the levels they are and pricing has remained relatively sound at $50 makes little sense to me. Remember the huge "contagio" scenario that was building up in Jan and Feb. Where is that oil now? Out on the ocean. That stuff isn't even in the "system" to be accounted for in terms of inventory. I'm no expert but i could see oil at $30-35. But what do i know I’m just a hick- but when things don't make sense they just don't make sense. Oil hanging at $50 makes little sense considering the inventory issues. Something has to give.

I don't want to destroy the price of oil- it should have a price like anything else that is determined by the market. The only reason I think they should raise the margin requirements is that I’m tired of "investors/speculators" being pariahs on the American Consumer. Last summer they brought the country to it's knees- for what greed.

Remember all the people talking their book: Goldman Saks saying oil would go to $240 and T-Bone Pickens saying the same.

I read somewhere that two guys from Stanford figured out that $11 billion could control World Wide oil through the options market. What self respecting hedge fund didn't have $11 billion last summer?

Apr 26 06:07 PM

[whoguess:]

You have ignored a crucial factor, that is, the very real possibility that under the Obama administration, there will be massive conversion of vehicles from gasoline fuel to natural-gas fuel, given the recent huge discovery of shale gas reserves and the cheap extraction costs. This will substantially reduce U.S. and North American crude oil and gasoline consumption and produce a depressing effect on future crude oil prices from rising

Apr 26 06:51 PM

[WayneinOregon:]

Could you write your next article in plain English please, with about half the words?

Apr 27 03:16 AM

[donzelion:]

Author is over-generalizing here. There is no monolithic "West" with the same pattern of petrol consumption, nor is there a monolithic "developing world" with routine patterns. Rather, one must focus upon political/cultural distinctions to find any hope of reaching long-term predictions about trends.

Want Proof? Consider: Americans use significantly more petrol than Europeans. Why? Petrol taxes and public transit networks. But why do Europeans have large petrol taxes and public transit networks while Americans do not? Answer: federalism/provincialism drives outcomes in America in a different direction than in Europe.

Under the American budgetary system, a new bridge in Alaska with little traffic may beat out maintenance allotments for an old bridge in Missouri. It's not because one political party is smart and the other is stupid, but because provincialism drives outcomes in the Senate. In Europe, by contrast, parliamentary systems drive budgets so that a new rail route from one urban hub to another will beat out the provincial interests of any specific municipality.

American investment goes towards plans that promote petrol consumption; European investment goes towards plans that reduce petrol consumption. It's not because one is smart/good/nice/etc. - it's because of their political culture.

Same principle applies to India and China. India is traditionally a "train culture" (as a result of colonial history) while China is traditionally a "road culture" (as a result of feudal history and lengthy periods of weak central government). However, India is increasingly "provincializing" (witness the growth of local parties and decline of national parties), while China has been fully centralized for decades.

As a result, India is trying to invest in road expansion/auto plans, while China is investing in massive train networks. At this time, China uses slightly more petrol per person - but I'd expect that to flip in the near future if the political/cultural trend continues (just as the total population of India is projected to surpass China in the near future).

Apr 27 07:25 AM

[Freya:]

freefall51: Check out recent news on ZNNMF.

Still all potential, its a spec on my part.

Apr 26 01:54 AM

[Freya:]

Excellent Article, From a Western economic viewpoint demand has indeed been flat to dropping for years. From an Asian+ Economic outlook, demand has been accelerating for years also.

Can the West curb its own demand faster than the rest of World increases theirs? On a population basis, its a decided No. They want our comforts. They have seen what the West has on the Internet. They know they can have refrigeration, heating, cooling, Television, etc., they can get to our lifestyle levels.

Their economic expansion has slowed, it has not been stopped.

Meanwhile, The West has come to a screeching halt. Unfortunately that halt does not diminish our reliance on Oil/Nat gas. Especially here in the USA.

Outside of vehicle oil reliance: Cosmetics, pesticides, ashphalt, fertilizers, lubricants (how long do you think those windmills will spin without lubricants), Plastics (constant shift to this), polyesters, power plants(Nat. Gas), etc.

Oil use is increasing in these areas and when we start to grow again, the pressure will be greater than before because we continue to deplete our supply by 6.7% annually, and shutter expensive projects simultaneously.

We subsidize ethanol, farmers, steel(via tariffs), etc. They subsidize Gasoline, there were riots in Iran when the Government tried to double the price of gas last year from, I believe it was around 22 Cents to 44 cents, or some such numbers. This is a common practice. Other nations have similar subsidies.

Come 2010, when the physical portion of our Stimulus package comes into play, we will be further behind the curve than we were in 2002-3.

Thats when things will become really interesting, a recovery in the making with rising inflation.

Apr 26 01:04 AM