Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions
It's time to pick up the thread of our readings on the future of the Oil Industry and extend it to a structural picture of the future. Within our limits of course. The prior post provided a sampling of readings as well as a strategic summary (). Here we'd like to tunnel into the big picture and little bit and take a look at price trends, energy demand patterns and long-term supply-demand balances. Or as the case is...supply-demand imbalances. Let's start with the following chart on long-term prices and S/D trends.
In some ways no big surprises, at least until you look fairly closely. The top sub-chart shows annual growth rates in world supply, demand and the balance along with trends for the former. The bottom sub-chart shows oil prices, real oil prices and YoY% changes in real prices since '64. A couple of "small" surprises. While we did our own calculations of real prices, so they're at odds with the official ones, our guesstimate is that they are as high as they've ever been and climbing. The surplus of S>D has shrunk abruptly but the rate of growth in Demand has now shrunk below that of Supply ! If that were the long-term trend we'd be pretty happy. That reinforces many of the arguments we made.
After the break we look at the bigger picture strategic issues but here's the bottomline, again. Oil is economically and affordably available but is increasingly controlled by non-market decision-making. And we are increasingly hostage to that decision-making almost entirely thru our own choices. Until we have a major national commitment to a national energy policy that is pragmatic, workable and realistic these trends will continue. And will likely accelerate. And you should note that this is NOT something foisted off on us. Who owns an SUV ? What's the H.P. in your car ? We choose to pay bottom-dollar for gas in the last several decades instead of pursuing alternatives. No the vultures are coming home to roost.
Energy Consumption vs Supply
Consider the chart from the most recent National Energy Plan (NEP) which dates from circa '01. It tells us something we've known for a long-time. That is, demand >> supply. The problem is that while we've known we haven't done much about it. And since this work was done the entire structure of world energy supply and demand has undergone a major structural shift. Which means these estimates are likely conservative in the extreme. Not in terms of our D>S but it terms of supply availabilities.
Long-term World Oil Prices
Nor is this problem likely to go away anytime soon. Here are DOE's assessments of long-term oil prices under high, base, and low oil-price cases from now until 2030. A couple of key points to notice. These were done long enough ago that we've already blown thru the high price. Even under the high price scenario total demand keeps growing steadily. And the underlying realities that oil could be available are reflected. So we're back to geo-political and offshore-control premia being built into the current prices. Which suggests in the short- and intermediate-terms that prices could come down.
World Reserves Sourcing
Remember we keep talking about the huge structural changes. Well here's one way to look at it. BigOil no longer controls its' fate nor ours. More and more of the world's oil reserves are somewhere else. In fact if the WSJ's take is correct approx. 7% of the world's oil reserves are open to free, market-based competition, with another 12% under limited access. Which leaves 65% + 16% = 81% of the world's oil under restricted, controlled access.
Which would actually be o.k. if we were sure it'd come onto the market according to economic and not political forces. Reinforcing our point out oil being available. But also reinforcing the two critical points. Decision making is political and they're enforceable. And second, most/many/all of the political entities are not investing in existing production as required to maintain flow. Nor in exploration and development to replace declining production from old fields. Oops...or better yet damm.
US Political Choices
While Peak Oil Theory would argue that much of the US's continental reserves have been discovered, developed and used up we don't know about our own offshore reserves. Which judging from prior geological work as well as recent discoveries, e.g. Brazil, may in fact offer extensive resources for development. Unfortunately, like almost every other energy policy switch we could throw, this one is also in the OFF position.
We need a sustained, multi-decade effort to develop new sources of energy, new technologies for using what we have, promoting conservation and demand reduction and we need to commit to it. This is our choice. How do you vote ? Meanwhile just remember when you buy an OECD oil major you're buying the cash flow of a depreciating asset. And you can't invest in that other 80%+ of the world's oil.