The Global Race Between Demand and Exports

By Jeffrey J. Brown

A good report. If you all are in a hurry, just read the first paragraph. That's where the most interesting info is, most notably the fact that world oil consumption went up during the great depression. Bull

Since 1929 is a frequent topic these days, I checked out world oil consumption from 1929 to 1939, and I found that world consumption in 1939 was up from 1929. In fact, it looks like 1930 was the only down year in this time period. One of the factors contributing to the increase in consumption was that millions of people wanted to drive cars for the first time. For example, there were three million more cars on the road in the U.S. in 1937 than in 1929, according to Frederick Allen.

Today, hundreds of millions of people worldwide want to drive cars for the first time, while oil consumption worldwide is up about tenfold from the Thirties.

There is some discussion about declining demand for oil, but one point that is frequently overlooked is that the demand for exported oil worldwide has actually shown two years of accelerating declines, as declining net oil exports were auctioned off to the high bidders, with the low bidders being forced to conserve. It’s important to keep in mind that the best definition of demand is what someone is willing and able to pay. By definition, we have seen two years of forced reduction in the demand for exported oil as net oil exports worldwide fell at a rate of -1.1%/year in 2006 and -2.2%/year in 2007 (EIA).

Our Export Land Model, recent case histories, and current data suggest that we should continue to see an accelerating long-term net export decline rate. The price of oil is therefore a horserace between declining demand and declining net oil exports. While we could certainly see some short-term slowdowns in the net export decline rate, I think that the long-term decline rate will be relentless -- and accelerating.

For example, even Saudi Arabia, which has recently shown a rebound in production, isn’t showing very impressive net export numbers, relative to their 2005 rate. The actual EIA net oil exports from Saudi Arabia are shown, along with my 2008 estimate:

Note that the cumulative shortfall -- between what Saudi Arabia would have exported at their 2005 rate of 9.1 mbpd and what they have actually exported -- will almost certainly cross the one-billion-barrel mark next year. These are the numbers that almost no one in the media mentions when they talk about the rebound in Saudi production (to an annual production rate below their 2005 rate).

Unfortunately, all of this suggests that the really bad news for financial institutions is in the future. An interesting thought experiment: What is the intrinsic value of the world’s 100 largest financial institutions without the world’s 100 largest oil fields, and what is the intrinsic value of the world’s 100 largest oil fields without the world’s 100 largest financial institutions?

I suspect that a good deal of the recent short-term weakness in oil prices has been due to forced selling of energy holdings, which can only continue for so long until fundamentals reassert themselves, and I expect that an accelerating net export decline will outpace the decline in demand, resulting in higher oil prices.

Jeffrey Brown, a contributing editor to The Casey Report, is a petroleum geologist and a recognized authority on energy export issues.