Oil Consumption: How Does Today Compare to 1980?

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?

The offshore drillers like Transocean (RIG), Diamond Offshore (DO) and Pride (PDE) are very well positioned, as are oilfield equipment makers like National Oilwell Varco (NOV).

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.

Comments

[The Real Ex...:]

A little late in these picks aren't you? It doesn't take a genius atthis point to push the oil stocks. Wow you guys are pinheads. In fact, this might be a good sign to start bailing on oil stocks - when the idiots start pushing them it's usually a good contrarian indicator.

2008 Jun 02 10:33 AM

[The Real Ex...:]

No one wants to buy your crappy research. If Wall Street reserach stinks (and it does) then yours stinks by a factor of 10,000 more. You guys are really clowns and you need to realize that and stop trying to make people think you are not.

2008 Jun 02 10:34 AM

[VP:]

Not very helpful. I think most of us know that India and China are using more oil. The real question is have stock prices gotten to far in front of demand and why or why not? My opinion, it is smelling and acting like a bubble so stay away.

2008 Jun 02 10:47 AM

[bbowen7:]

au contraire. For short term investors, the question may be whether the current price reflects the current information. For longer term investors, the question is "do the underlying factors and trends suggest that the current situation will continue." The key equation for me is the inexorable, broad-based growth relative to the constraints in supply. Any time I can get more data on this, it is helpful.
RightinSanFrancisco.co...

2008 Jun 02 11:12 AM

[Edward Janeck:]

oil is going up. I write about it today @ theinvestingspeculator...

2008 Jun 02 11:31 AM

[Smart Look:]

Not late to the game on at least one of the picks above. Clayton Williams (CWEI) looks remarkably inexpensive.

2008 Jun 02 01:13 PM

[Smart Look:]

Clayton Williams (CWEI) is still remarkably inexpensive. Thanks for the info!

2008 Jun 02 01:15 PM

[DirtSimple:]

Hmmmm ... Let's see.... CWEI ... "still remarkably inexpensive", where at $94.79 today, it's only a mere triple from $30 in December (just 6 months!)??? I wonder at what point it becomes "expensive"?

Looks more than a little too hyperbolic for my money. I'd run for the exit on this one if I had any money in it.

2008 Jun 02 10:08 PM

[nycDem:]

PDE, RIG and DO are still undervalued. And right now they are a buy.

RIG:
TTM P/E of 9.82
PEG of .3
TTM EPS is 15.14
Growth (via Yahoo) is 31.48% a year for the next 5 years.

Yes, RIG is waaaay undervalued.

I don't know about the others.

I do know that "The Real Expert" is really angry! Grrrr. And he had to post twice to make his point. I read his other posts as well. Maybe he needs a hug. :-)

2008 Jun 03 02:10 AM

[thomas728:]

It has come to: "any stock serving a commodity need, regardless of it's internals, has
become attached to the price of the underlying traded commodity."

Well, that statement will definitely cause a ton of "so whats", "they always have", "tell
us something we don't know", and a chorus of some vile insults.

As great a company is (RIG etc.) it will fall like a rock these days when that underlying
commodity gets traded to what is perceived as a trend. "Hey !!! They are buying/selling
crude down there as if this were Monopoly.......The stockholder then thinks of nothing
redeeming on his favorite sector and unloads his position.

That is not even ground and unless I get some confirmation on direction I have to
view the stock with jaundiced eyes.......and that is not how I view stocks for any
holding term.

Thanks


On Jun 02 11:12 AM Right in San Francisco wrote:

> au contraire. For short term investors, the question may be whether
> the current price reflects the current information. For longer term
> investors, the question is "do the underlying factors and trends
> suggest that the current situation will continue." The key equation
> for me is the inexorable, broad-based growth relative to the constraints
> in supply. Any time I can get more data on this, it is helpful.
>
> RightinSanFrancisco.co...

2008 Jun 09 04:55 PM