Expect Slow Growth of Crude Oil Demand

Crude oil is currently the dominant source of energy employed around the world for various industrial and domestic processes. Many energy projection models are therefore based on oil and in such an economic downturn as this, any indication (even if only perceived) of a rebound is often a trigger for investment therein. Two points however are informative here:

First the increase in energy demand associated with economic rebound may not translate to a commensurate increase in the demand for oil. For example, recent efficiency measures introduced by President Barack Obama in the United States are expected to reduce oil demand by a massive 1.8 billion barrels within 7 years; this is equivalent to the total U.S. domestic production for 2008. Even in a strong economic rebound case, a commensurate increase in the demand for oil is precluded by such "demand destruction".

Similarly, claims that the projected reduction in developed economies' oil demand will be counterbalanced by that of developing economies such as Brazil and China may therefore be untenable. These countries have elaborate alternative energy development programs and as such, crude oil will constitute lower proportions of their energy mix, even as their economies strongly rebound.

Brazil, in spite of recent massive crude oil discoveries especially in the Santos Basin, is forging ahead with its bioethanol program, currently the world's most successful. Transportation accounts for a significant proportion of global crude oil consumption and about 50% of all Brazil's vehicles run on ethanol ranging from E24 to E100 (0% gasoline). Its ethanol program which utilizes sugarcane for feedstock is viable (with respect to gasoline) down to a crude oil price of US$30 per barrel and with crude prices currently about twice that benchmark, it faces no imminent threat. (In contrast, the mainly corn-based U.S. ethanol program is still fraught with problems. The provenance of, and drivers of these problems are detailed in an earlier article, Notes On Bioethanol Programs In The United States.)

China also, as discussed in a previous post, driven by the projected energy demand of more than a billion increasingly affluent people as well as growing concerns about constraints to future global crude oil production has embarked on an extensive biofuels and renewable energy development program. For example, in a massive outsourcing venture, it has acquired nearly 5 million hectares of land for the cultivation of biofuels feedstock. Moreover, according to the United Nations Environment Programme, UNEP, China in the year 2008 became the world's largest wind market by newly installed capacity and the world's fourth largest by overall capacity. In the same year also according to UNEP, it became the world's largest manufacturer of PVs for solar energy and 95% of that production was for export. China's seemingly aggressive "energy grab" is therefore often misunderstood; It is actually a deliberate policy aimed at addressing near-term energy requirements while developing long-term alternative capacities.

Secondly, the attribution, in energy demand projection models, of energy value equivalence to equal volumes of energy sources may not reflect actual demand. This forms part of the crux of Professor Kjell Aleklett's arguments in his reported critique of common demand projection models. He argues there that volume equivalence between two different energy sources such as in NGLs, does not necessarily equate to energy value equivalence. Where these NGLs for example constitute only a small proportion of the projection parameter, the result may just be academic. Some, who incidentally are not even scientists dismiss the Professor's arguments by saying that he is a physicist and not a geophysicist or geologist; but if a physicist is not qualified to discuss energy and matter, one wonders who is.

Rebound from the current global economic slump is expected to be slow and protracted, and with it, the crude oil demand. Some analysts have however projected an oil price shock within 3 years citing an unlikely situation where supply facilities fail to meet demand requirements; but even in that unlikely event, the shock is unlikely to hold any market fundamental support.

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Comments

[kmi:]

I think a lot of folks think that when the US economy starts up again the US will return to the same daily energy consumption as pre 147/brrl oil.

There has a been a massive, mostly undocumented, demand destruction going on since those days. Besides CARS (under which most turn-ins are SUVs according to Hyundai www.autobloggreen.com/.../ anyway) or the new CAFE standards mandating huge efficiency increases (up to 40% for american cars and 17 percent in China blogs.edmunds.com/gree...), in my industry (commercial real estate) I am watching most of my partners, friends, and associates absolutely crush their energy use after being abused by expensive energy. Energy being our largest expense after debt service, watching prices double and budgets get annihilated, and then losing equity to pay energy bills... no one wants to see that again (personally I am looking into geothermal)

I doubt it's just a fad, or just the people I know and meet, and I suspect there has been demand destruction elsewhere in the economy as well. Traders and speculators are looking at charts and graphs trying to figure out 'trading ranges' and 'consumption trends' and watching the barrel price of crude smacks to me of speculation since the price simply does not correlate to our experience of where it -should- be.

I don't speculate on oil in the markets but I do have a vested interest in it as a result of my primary business.

Jul 30 02:29 PM

[VSD:]

is not about demand, it is about the dollar.

Jul 30 04:52 PM