Director of Equity Research Dirk van Dijk, CFA has done a little research, comparing the last time the world saw an “oil shock,” 1980, with numbers leading up to the current oil price situation we are experiencing globally. We sat him down to get an idea of how things are different today.
You have recently looked into the differences in global oil consumption from recent times as compared to the oil shock in 1980. What were some of your findings?
First, it should be noted the data comes from the BP Annual Statistical Review. Unfortunately, the 2008 edition is not out yet, so the latest data is for 2006. The 2008 edition will have the 2007 data.
In 1980, the world consumed 61.731 million barrels per day (mb/d); in 2006 it was consuming 83.719 mb/d. Back then, it was 27.6% of the world total; in 2006 the U.S. consumed 20.589 mb/d, or 24.1% of the total.
Interestingly, back in 1980, Europe's big four (Germany, France, Italy and the U.K.) consumed 8.962 mb/d (14.5%)as opposed to 8.148 mb/d or 9.7% in 2006. Japan consumed 4.936 mb/d (8.0%); in 2006, it consumed 5.164 mb/d (6.2%).
What tells me that the biggest differences can be seen in China and India?
Common sense will tell you that, and so will I. In 1980, China consumed 1.694 mb/d (2.7%); in 2006 it consumed 7.445 mb/d or 8.9%. In 1980, India consumed 0.643 mb/d or 1.0% of the world's total; in 2006 it consumed 2.575 mb/d or 3.1% of the world's total.
There are so many trends I can cite that would likely be of interest to investors. But another biggie is that in 1980, the U.S. was producing 10.170 mb/d, or 16.2% of the world's total. In 2006, the U.S. produced 6.871 mb/d, or 8.4% of the total. That's nearly half of what it was a quarter-century previous.
What are you seeing as far as oil availability, according to this study?
Currently existing fields worldwide are declining at approximately 4.5% per year. This means each year the world has to bring on line the equivalent of another Nigeria plus another Indonesia, just to keep production flat.
So what can we conclude from these factoids? Well for starters, the shape of world demand has shifted significantly. Back then, oil demand was almost entirely about what the big industrialized countries were consuming -- over half of world consumption came from just six countries. Since then, the rest of the world has become much more important.
Secondly, using less oil does not mean economic collapse. Since 1980, consumption is actually down in the Europe big four by 9.1%, and Japan's consumption is up only 4.6%. Despite our consumption rising by 20.7% over that more than a quarter-century span, as a percentage of the world it actually fell.
What big questions are these findings causing you to make?
Basically these: Will we see world consumption decline again in response to high prices? Will the emerging economies like China and India bring their consumption down the way the industrialized world did in response to the last oil shock?
It seems clear that high prices are the only thing that is effective in causing demand to decline. I think that high prices are likely to be very persistent, and would continue to heavily overweight Energy in all portfolios.
Which specific companies would you recommend here?
Oil firms which have the ability to boost their production are also very attractive. On the large cap front, first and foremost of these is Petrobras (PBR).
However, there are several much smaller E&P companies that fit the bill as well. Some of my favorites are Double Eagle (DBLE), Warren Resources (WRES), Clayton Williams (CWEI) and Petroleum Development (PETD).
Dirk van Dijk, CFA is the Director of Zacks Equity Research.