When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble. Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.
The following month, prominent peak oil critic and cornucopian Daniel Yergin of IHS-CERA changed his stance: The peak oil threat would be neutralized by peak demand. Gasoline consumption had peaked in the U.S. and Europe, he argued, due to the combined effects of increasing efficiency, biofuels, and the recession.
In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.
In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.
Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world's most developed economies to shrink. At $147, it wreaked serious damage.
As I explained in "Investment Themes for the Next Decade," the new normal will be cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing, only to bump our heads against the ceiling once more.
Scooters Will Kill SUVs
Two interesting news stories crossed the wire this week, which portend badly for the world's #1 net importer, the U.S.
The first was a Reuters report that the last quarter of 2009 had "wiped out" the equity of Mexican state oil monopoly Pemex, leaving it $1.4 billion in the negative. Falling crude output, falling refining margins and a burgeoning dependency of the state on its revenues had squeezed it to death.
Not only did the report offer further confirmation that the oil export crisis has arrived, but it also confirmed my growing suspicion that the oil production everyone has assumed will come online in five to ten years might, in fact, fail to materialize. Negative equity companies have a hard time raising capital for new exploration.
The second was a Bloomberg report that Saudi Arabia had agreed to double its oil exports to India, to some 866,000 barrels per day. India indicated separately that its onshore production of oil may peak this year.
This adds to the pressure on Saudi Arabia's exports, whose oil shipments to China have been growing at a rate of 11-12% per year and now stand at roughly 1 million barrels per day (mbpd). China has eclipsed the U.S. as the primary bidder for Saudi oil, while U.S. imports from the Persian nation have fallen to a 22-year low.
The last two years have seen the marginal buyers of oil shift decisively to the non-OECD countries. A gallon of fuel delivers so much value in China and Indiathink peasants on scootersthat even at $120 a barrel, remarkable economic growth rates are possible. In major oil exporting countries like Saudi Arabia and Venezuela, where subsidized gasoline still sells for under 25 cents a gallon, the appetite for fuel grows steadily every year with little thought given to efficiency.
It's a different story in the U.S. For debt-laden consumers, an extra $50 or $75 to fill up the tank on an SUV every month sharply reduced discretionary income and starved the economy of its most fundamental driver, consumer demand.
The Real Meaning of Peak Demand
The most promising effort I've seen to quantify the role of efficiency in peak demand was a report in October of last year by Paul Sankey of Deutsche Bank entitled, "The Peak Oil Market." My initial excitement quickly gave way to disappointment as dug into it, however, as I realized that its confident assertions were unsupported by the data. I applauded the effort enthusiasticallyand I hope to see more serious work along the same linesbut it fell far short of proving that energy transition can be accomplished under the status quo of economic growth, let alone its optimistic twist on "The end is nigh for the age of oil."
