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Walking the Tightrope

There has been a noticeable change in the reporting of global oil supply issues recently, although not locally. First I was quite surprised to see this article in the UK’s Daily Telegraph. Surprised because hitherto the Telegraph has largely run skeptical views on Peak Oil:

Plateau oil meets 125m Chinese cars

The clever, or coy, replacement of ‘peak’ with ‘plateau’ refers to the fact that global oil supply has been bouncing around on a bumpy plateau since 2005 despite the ever rising price signal from the market. Economics 101 says that this shouldn’t happen; increase in price should lead to an increase in supply. And as the years of no meaningful addition to supply keep accumulating it seems we really have met a geological limit to oil production. As the article points out:

‘The West has the disquieting experience of watching crude soar even as we languish in stagnation.’

And the reason for this is that ‘The West’ or the OECD, for the first time, is not the source of the demand that is driving the increase in price. Hence the reference to 125m Chinese cars, as this is the number of additional cars the article claims are due to hit Chinese roads over the next five years. This is a bit of an oversimplification as it isn’t just in China by any means where demand is growing but all over the developing world this is the case, including the countries that are net exporters of oil like in the Middle East. So much so they increasingly have a smaller quantity to export even where they are maintaining production.

Here’s a consumption graph, sure China and India are steadily growing, but look at that ‘non-OECD’ demand [including Chindia]. Soon to overtake the OECD as the biggest draw on world oil supply. This really is the beginning of a new era.

souce: Samuel Foucher/Logi Energy LLC

Note that there has been a decline in Europe and US, which largely reflects contracting economies. Also something of shame that Japan is not separated out here as post Fukushima they are the only sizable OCED nation to be increasing imports, but not because of a booming economy, quite the reverse, in order to replace the knocked out nuclear energy source.

So you can see why the title of the article with chart is called:

Oil demand shift: Asia takes over

Vietnam; efficient use of transport!

A great image illustrating a very sharp summary of the current situation:

The realization that oil prices aren’t about them anymore has been slow to dawn on Americans after a century of being the world’s swing consumers. But the fact is that the world’s developing economies have been outbidding the developed OECD countries for oil since 2005. Some time this year, non-OECD oil demand will overtake OECD demand, and they will stay in the driver’s seat for the remainder of oil’s reign as the lifeblood of the global economy.


Further, this new demand trend is already structurally baked-in. There is really nothing that America can do about it other than to consume less.

The sheer numbers of the global population using oil more efficiently will doom us to being the buyer of last resort under virtually any U.S. fuel economy standard. The roughly one billion people in the U.S. and Europe combined are now competing for oil with four billion people in Asia and over one billion more in Latin America, the Former Soviet Union and the Middle East. It’s like a tug-of-war with five people on one end of the rope and one on the other.

The article concludes with this sobering observation:

The conclusion should be obvious and indisputable: We’ll just hand over the keys. As I said last October, OECD economies should expect growthless stagnation at best. Oil has become a zero-sum market where the developing world’s gain will be the OECD’s loss. It’s time we woke up to the new reality of oil demand and acted accordingly. Not by imagining that we’ll be running more than 240 million slightly more efficient vehicles in the future, but by transitioning to rail and retiring them altogether.

The important point is that peak or plateau oil is not about oil suddenly running out but rather the competition for it heating up yet the supply not growing, and at some point beginning to decline. For The US this comes with the uncomfortable and no doubt to many unacceptable idea that they no longer call the shots in this vital market. At least in NZ we have never suffered from this burden but we are nonetheless just as vulnerable to being all but priced out of the oil market as this decade unfolds.

For now the appreciating NZ dollar has allowed us to stay slumbering on this issue as the international oil trade deals in USD, so the rising crude price has not meant reciprocal rises at the pump here. However this makes us doubly vulnerable as all it will take for $3/litre is for the NZD to settle down closer to its historical average with the USD. But then factor in any continuation of rising crude prices too and things could get very alarming very quickly. And all of this without anything special happening like Iran being attacked by the Israelis or any other above ground event [also, of course, possible].

The reason this isn’t understood as much as you might expect is that this is a very big departure from everyones’ experience, so despite seven years of stagnant production it just doesn’t fit with a lifetime of available oil and of the oil market’s responsiveness to the requirements of the West. Really big changes are not only not anticipated they are often not even accepted once they’ve happened. Welcome to the new century.

Further links: [short and sharp] [shows role of  high oil costs in Euros in current economy, good stuff in the comments here too esp. about US v. Euro train use]

Supply chart, non-opec including the world's biggest producer: Russia


22 comments to Walking the Tightrope

  • Christopher

    Thanks Patrick for this post, which starts to lay out some hard truths.

    I certainly wince at $2.16/l, but will think very carefully at $3/l, as will many other people.

  • Stu Donovan

    Interesting, but am confused by the nationalistic frame in the newspaper article is presented – is the oil demand curve made up of “blocks” that are readily segmented by country? I think not.

    I bet the highest willingness to pay still resides in OECD countries, even if they have been trimming low-value consumption in recent times. The oil demand curve is segregated solely by willingness to pay, rather than nationality (except perhaps in centrally planned economies, which as I understand are something of the minority when it comes to overall demand).

    All I can draw from graphs is that relatively large amounts of low-value oil consumption in OECD countries has been trimmed as prices rise. This trend may or may not continue – indeed at some point the price rises will start to bite into other demand segments (which may or may not be in the OECD).

    The other thing to remember is that many non-OECD countries have crazy subsidies for petrol (Chindia) for example. As prices and demand continue to rise these subsidies will be more difficult to sustain, which in turn may cause a painful price correction at some point in the future. What we are seeing here may be the willingness to pay of the Chinese government, rather than the Chinese consumer.

    • There is a lot of emotional hokum around various nations’ sense of entitlement to resources in the popular press so I see where you are coming from [beautifully expressed in the joke about the American asking of the Middle East; "How did our oil get under their deserts?" haha].
      But of course the discussion is around nations because that’s the form the data comes in, but also because of the play of exchange rates and policy. For example in Euro terms crude is currently as expensive now as it was when it hit the historical high USD level of 140, contributing to their problems [and the North Sea resource peaked in 1999 and has been declining ever since]. But in NZD and especially AUD terms we are not experiencing the pain from these prices that they are in the UK and Europe, because of the strength of our currencies against the USD [though last year we spent 8 billion NZD on oil]. So it is a useful analysis and especially so at this moment because we are witnessing a very big change, perhaps you missed it?, Oil price is no longer responsive to demand in western economies. This is huge, because it means that when we go into recession we can no longer expect the price of this vital input to drop in response to our drop in demand, and help to pull us out. Ever since the industrial economy switched from coal to oil the west and the US in particular has always been the demand price driver. Not any more. Hence the line about the best the west can hope for now is stagnation. Remember oil prices drive food prices and oil is an incredibly useful and extremely difficult resource to find substitutes for, especially for road based transportation, and especially quickly.

      There are other ways to look at the world through the oil lens, probably the most important one simply divides it into net exporters and net importers. It is especially interesting when a country crosses over from exporting to importing. Recent nations to do this include Egypt and the UK. It would seem that the pain that this transition causes can often comes with rioting on the streets….!

      And you may well bet that the OCED are willing to pay for oil but the numbers are saying otherwise; the decline in the US is greater than the additions from unconventional sources such as fracking. Ironically because US fuel is so lightly taxed [and the industry in fact subsidised], their pump price is more responsive to crude price movements so the price pain in the US is high. A lack of transport options is also, of course, a problem for many there too.

      I am puzzled that the idea that oil is foundation of the world economy and industrial civilisation seems debatable, perhaps because for everyone living today it has always been there that this dependency has become invisible? [Have we all forgotten the 1970s?]. Or is it, as an MP said to me recently, that thinking about it is too depressing?

      Luckily some are thinking about this [I wish I could go!]:

  • Geoff

    At any one time over the past 40 years, there have been graphs and charts showing oil running out, but it has never actually eventuated.

    At least there are two facts that are undisputable: 1) Petrol is cheap, and; 2) Petrol stations always have it available.

    • The Trickster

      Cheap in comparison to what exactly?

      • Geoff

        Botted water, milk, coke, you name it. Considering the mammoth effort of extracting it from under the sea, transporting it to a refinery, refining it, then transporting it around the world to a storage facility, then transporting it to a petrol station, then selling it cheaper than bottled water – it’s cheap as.

        It isn’t even going up in price very much. Passed $2 in NZ in 2008, and today is $2.14. In fact in Australia it’s only $1.60, because the NZ price is artificially inflated with taxes.

        It’s cheap, and it’s always available, and neither of those facts would be the case if it was close to running out.

        • obi

          A few months ago Wired magazine had an article about odd inventions or ideas that had appeared in the pages of popular science and engineering magazines in the past. One of these was a Flash Gordon looking “RADIO-FUEL AUTOS MAY SOLVE GAS PROBLEM” vehicle. Apparently someone thought you could power vehicles by beaming radio energy at them. “Autos operated on radio fuel may become a reality if the present consumption of oil continues and no new sources are discovered”. So people were predicting the end of affordable oil in 1936… In fact, they seem to have been concerned about the issue for years. But here we are 76 years later, a litre of petrol costs about 12 minutes of the minimum wage, and there aren’t zany-looking radio cars speeding along the streets.

          I doubt that petrol will be unaffordable in my lifetime. But if I’m wrong then the engineers of 1936 have a cool steam punk solution that we can use instead.

          • Same answer as Geoff Obi, you look backwards to prove a point about forwards, however you do add kooky but irrelevant and entertaining link, so more fun but still not persuasive.

          • bbc

            I never understand people like you obi who seem to think oil is a limitless resource – do you really believe that? and furthermore do you really think that emerging economies who are doing their damndest to emulate our current energy wasteful lives aren’t going to be driving the price up in the coming years?

        • Try reading the post again Geoff, high AUD and NZD is why it hasn’t risen in NZ and Aus recently. Crude has risen from $USD 17 in 1999 to well over $USD100 now. Averaging USD111 in 2011. It hasn’t run out, and will not all that soon, but there has been growing demand but not growing supply since 2005. And no sign of that reversing either because of new supply or a drop in demand. Therefore further price rise is more likely than not.

          • Bryce

            It is not going to run out soon but it is getting harder to get, therefore more expensive, and also consumption is increasing yearly by a huge amount. Combine those factors with a $NZ that will eventually come down and I believe we are going to get $3 per liter petrol before most people expect it.

          • Exactly Bryce, you got it, but remember 2008; if it all gets too crazy again its likely to crash whole economies and kill demand dead and throw the whole machine into panic again. Result; new highs followed by plunging lows before it climbs back up starts all over again. Extreme volatility like this would probably the worst outcome; a steady climb at least sends a consistent price signal to change our ways, but crazy highs and lows will lead to all sorts of mad choices and wild blame games…. Interesting times.

        • Bryce

          @ Geoff
          It took 80 years to get to $1 but just 10 or 11 to get to $2. By my reckoning that’s a big change but hey, whatever you want to believe.

    • yes exactly the point of my last paragraph; tendency to believe personal experience of continuity over facts pointing to change. A view you share with the MoT it seems. To an extent we are all walking backwards into the future; the only clear view we have is of what has passed. What I am suggesting, with evidence, is that
      1. the future looks like it will be different from the past [because it already is] in other words; discontinuity. And
      2. the longer we ignore this possibility [likelihood] the more painful the change will be.

      To continue the metaphor; when walking backwards it pays to look over your shoulder occasionally. Especially because:

      “The difficulty lies, not in the new ideas, but in escaping from the old ones.” -Keynes

  • I will do a follow up post to show why I don’t find the prospect of a more oil constrained future depressing but to kick this off here is exactly the sort of technological outcome that I am expecting:

    In short the cities with the best spatial order and most efficient public transport will thrive, but the roads won’t be empty, especially of two wheeled devices, often organised like in the above story.

  • Geoff

    @Bryce, petrol hit $2 in 2008, and today it’s $2.15. As I say, it’s a pointless argument, because at the end of the day the two sure fire indicators of oil becoming scarce have not eventuated. The petrol stations never run out, and the price is reasonable.

    All the arguments people such as yourself put forward have been around for decades. The only cliche missing here is that I have my head buried in the sand. That ones been around in the oil debate for 40 years as well.

    I guarantee that ten years from now nothing will have changed. It’ll still be available, relatively cheap, and there will still be people claiming it only has 5-10 years to go, 50 years after they first said it only has 5-10 years to go.

    • bbc

      “The petrol stations never run out, and the price is reasonable.”

      Although I was never around, there certainly were petrol shortages in the 70′s, it wasn’t because oil had run out and no one is saying it ever will completely run out – there will always be some oil that is too costly or environmentally damaging to extract, however, assuming that it will always be available and always cheap is ignoring the reality. That said, what is the issue that people have with being more sustainable and finding ways to use less of something, just because it’s cheap doesn’t mean we should use as much as we possibly can for very little gain.

    • Bryce

      I never said it was going to run out but it is going to get more expensive. I’ll be happy to be proven wrong on this one :-).

      China car sales
      2000 – 2.07m vehicles
      2011 – 18.5m vehicles

      And they anticipate growth at 5%. That is an extra 900,000 vehicles this year alone, based on last years figures.

  • conan

    And another for the mix:

    Those pesky Saudis using the stuff themselves.

  • Yes and this in the Herald.

    The AA conceding that ‘alternatives to road travel need to be developed’ but still pretending that efficiency will do it. Well fuel efficiency while important cannot make a big enough change, here is physicist Tom Murphy explaining why:

    Small matter of the laws of thermodynamics.

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