Back in May, we visited the notion of a new kind of "road rage" being driven by the idea that market speculators are driving up crude oil prices by as much as 60 percent of the price of a barrel. When a 98- pound kid can out-eat fatter, bigger people in competitive eating, it can be said that the one with the biggest appetite will win. Next time you fill your tanks at the next stop, you can look at your receipt and think that someone's appetite is pretty big-but whose?
The Washington Post has been running "Oil Shock," a series of articles this week by Steven Mufson. The series reviews all of the worldwide conditions that have been contributing to high crude oil prices. Unfortunately, aside from some very useful tidbits of information, the thrust of the articles is centered on the idea of "peak oil," that is, the idea that the world's oil wells are drying up. From Tuesday's article:
"Supply is not increasing fast enough to keep up with soaring global demand, putting ever more upward pressure on oil prices...many oil experts warn that the world's production will hit a peak soon if it hasn't already...Mexico's biggest field, Cantarell, is in steep decline. Indonesia has become a net oil importer, withdrawing from the Organization of the Petroleum Exporting Countries as output from its largest fields has slipped and new discoveries have lagged. Production in the North Sea is plummeting, and Russian output is hitting a plateau."
All of this is interesting information, but notice anything missing? What's missing is typically what's missing from just about every news article you read about worldwide supply of crude oil and the economic forces driving prices up: The numbers.
"Global demand" is tossed out as the reason for high gas prices. "Surging" demand in China is often thrown about as well, so often in fact, that no one bothers to question it and in turn, it looms ever larger in everyone's mind, taking on the image of a California gusher in the 1800s. You'll no doubt read articles that describe China's oil demand as "exploding." But question this everyone should.
One of the leading oil market strategists, David Kelly of J.P. Morgan recently admitted to the Washington Post, "One of the things I think is very important to realize is that the growth in the world oil consumption is not that strong." Huh?
The U.S. Energy Information Administration (EIA) in its recent monthly Short Term Energy Outlook report concluded that U.S. oil demand is expected to decline by 190,000 barrels per day in 2008. That is roughly 33 million barrels of oil over the next six months back into the market and only one of similar drops in demand seen in developed countries. Chinese consumption, according to the EIA, is in reality far from exploding. China's demand is expected to rise this year by only 400,000 barrels per day. That is roughly 70 million barrels over the next six months. That leaves a net 37 million barrels to be filled by similar drops elsewhere.
Now, these are big numbers for sure but it is hardly "surging oil demand." Last year, China imported half of its estimated 7 million barrel-per-day usage. The U.S., by contrast, consumes around 20.7 million barrels per day and imports a little more than half of that. Crunch the numbers and China's "surging" demand, growing 5 percent over its own total, is about 30 percent of the expected worldwide oil demand increase. So, yes, China's oil appetite contributes quite a bit to the worldwide demand. But...China's demand increase represents about .4 percent of total world demand. Yes, that is less than one-half of 1 percent. Keep in mind that the U.S. oil appetite represents about 25 percent of global oil use.
Annual global oil demand increases have changed little over the last few years and it is expected to stay constant at a bit more than 1 percent this year - as it has just about every year in the last seven. The EIA estimates that dropping oil demand in the industrialised world is more than offset by slightly growing consumption in developing countries, resulting in flat oil consumption this year. If we are truly in a supply crisis, speculators taking the long view would have driven up crude oil prices long ago. Instead, we are seven years in with consecutive rises in fuel prices while global use has remained fairly stagnant. Whose appetite are we feeding again?