Thursday, July 8, 2010

The importance of Oil Forecasting

The Oil Drum has an interesting pair of posts on future oil demand from the authoritative US department of Energy. The first shows how forecasts have come down substantially since 2007. It also shows how far out their forecast was for 2010 when it was made in 2007. If you have not come across the Oil Drum before it is an excellent source.

The supply will creep up from 86 mbpd today to approximately 92 mbpd to 2020, but that is not much growth, and indeed, is about the same as current global liquids production capacity. Moreover, it represents a reduction of nearly 4 mbpd from last year's forecast for 2020. On paper, the output of China has disappeared over the course of the last year.
The second post demonstrates quite well how far off the estimate of Chinese demand is likely to be.
Oil demand does not grow linearly with GDP. Rather, the bulk of oil demand growth occurs in the two decades during which societies typically acquire motor vehicles, after which per capita oil demand flattens.

Based on the experience of Korea and Japan, China's current population would be expected to consume approximately 55 million barrels per day at steady state (when per capita consumption plateaus), or nearly 2/3 of current global oil production, were the supply available.

This increase in demand can arise quite quickly. Japan's oil demand increased six fold in the twelve years prior to leveling out. Demand can also develop more slowly. In the case of Korea, a six-fold increase in consumption required twenty years, with much of the delay owing to OPEC pricing strategy following the second oil shock of 1979. Korea's model of development is potentially relevant for China, as China faces an oil price environment not entirely different from Korea's after 1979. Importantly, high oil prices from 1979 to 1985 did not destroy Korea's demand for oil. It only deferred it.

In contrast, the EIA sees China's oil consumption at only 10 mbpd for 2015, a growth rate of approximately 2.7% from current levels, and at only 16 mbpd by 2030. Is this consistent with a country whose vehicle sales are up 56% in the first five months of the year? Where sales of Audi's are up 77%, and those of BMW have doubled compared to the first five months of last year? Is China truly going to be satisfied, as the EIA would have it, with less than 1/5th of the per capita oil consumption of Korea in 2030, even though they should be similar by that time?

The differences in views about China's oil demand outlook have enormous policy implications. If the EIA is right, and China will forget how to grow, then pressures on the oil supply will be modest. On the other hand, if China is to develop like other countries in Asia, the pressure on the oil supply will be crushing, with oil shocks, recessions, and war all conceivable outcomes. The energy--as well as the economic and security--policy differences between the two scenarios are like night and day.


Adolf Fiinkensein said...

The whole analyis of what's available seems rather pointless when the Americans do not include known reserves in Alaska and other places in their figures simply because they haven't been drilled yet. You can bet your boots that if there was an conflagration in the middle east and the oil supply was cut off by the Muzzies in cahoots with the Chows, the Yanks would quick smart exploit their own vast but locked away reserves.

Anonymous said...

There's nothing here that strategic solutions to the Iran and China problems can't solve.

About half a broadside from an Ohio each should do it.