Every week the financial media make a big deal out of reporting the weekly crude oil inventories in the US. Traders will then bid the price of oil up or down based on these reports. The reporting is done with much fanfare from a correspondent who is strategically positioned on floor of the NYMEX to give the whole affair a sense of authority and importance. In fact the whole spectacle is Kabuki Theater unless you are a trader. There is never any discussion or analysis of long term secular demand trends in the emerging markets or what will have to be done on the supply side to accommodate this increased demand. My view is that commodities, and energy in particular, are going to become significantly more expensive and that this represents a huge long term investment theme.
Everybody already knows the story about growth in the emerging markets. We are constantly bombarded with stories about the spending habits of the new Chinese consumer or how many cars were sold in India last quarter. However, what does this really mean with respect to something like oil demand and pricing? Below I show a chart of per capita oil demand use in the United States.
click to enlarge
This chart is very illustrative of how oil use progresses as an economy industrializes and transitions from a rural agrarian economy to an urban industrial economy. Oil use leveled out below twenty five barrels per person per year. As a comparison I have next included a graph of Chinese per capita oil use.
It can be plainly seen that per capita Chinese oil demand growth is following the historical example of the US. I am not suggesting that Chinese per capita oil demand will rise to the twenty barrel level of the US. However, the argument can be made that per capita oil demand in China could grow to the level of Japan or South Korea. Japan's per capita consumption of oil is approximately fourteen barrels per person per year and South Korean per capita consumption is sixteen barrels. For the purpose of illustration let us assume that Chinese demand will increase to fifteen barrels per day which would put it in between Japan and South Korea. China's population is a little over 1.3 billion people, so doing the math 1.3 billion times 15 barrels per person per year divided by 365 days, means Chinese oil consumption would grow from the current 7.8 million barrels per day to 53 million barrels per day over the next couple of decades. Let’s now take a look at India and its 1.1. billion people. Current oil consumption per capita in India is .9 barrels per person per day or almost three million barrels per day. Doing the math using the same assumptions that were used in China’s case we arrive at 45 million barrels of oil consumption.
Of course I am not arguing that Chinese or Indian demand will grow to these levels, in fact demand will never reach those levels as the capacity to deliver that much oil simply does not exist. In addition I am also not taking into account other countries like Vietnam, Indonesia, the entire Middle East, South America, and most of sub-Saharan Africa, all of which have large populations and growing appetites for oil. What I am illustrating is that we know from the past history of industrializing countries that oil consumption must increase as a country industrializes and urbanizes. We know the number of people in these countries so we can say without a doubt that oil demand will increase. We also know for a fact that oil discovery and reserve growth around the world is stalling as indicated below.
Therefore, it becomes obvious that if the amount of oil that can be produced becomes constrained by lack of reserves, lack of new discoveries or by political considerations than the price must rise in order for the available supply to be allocated to its highest use. When one contemplates the facts the investment implications become obvious. However, the frightening reality of a resource constrained world also become obvious and a bit unsettling. This is illustrated by recent government reports such as the recent study published (.pdf) by the Joint Forces Command of the US military. The report said about energy demand to 2030,
To meet even the conservative growth rates posited in the economics section, global energy production would need to rise by 1.3% per year. By the 2030s, demand is estimated to be nearly 50%greater than today. To meet that demand, even assuming more effective conservation measures, the world would need to add roughly the equivalent of Saudi Arabia’s current energy production every seven years.
In addition, as pertains to Peak Oil, (the report actually used the words Peak Oil) the report stated,
Assuming the most optimistic scenario for improved petroleum production through enhanced recovery means, the development of non-conventional oils (such as oil shales or tarsands) and new discoveries, petroleum production will be hard pressed to meet the expected future demand of 118 million barrels per day.
In conclusion, oil prices must rise over time. Therefore, investments in exploration and production companies, oil service, and alternative energy must at a minimum be on the radar screen of every long term investor as the price of oil will have a greater long term impact on the future economic performance of the world then most investors realize.
Disclosure: No positions
