“Global Demand for Oil to Plummet,” screams the headline of the Financial Times on Dec. 10. Huh? No it won’t. Who are they trying to kid?

Global oil demand is not going to “plummet.” And for the FT to say so is just plain silly, if not irresponsible. OK, I know. There’s an old saying that they teach in journalism schools. “You have to sell newspapers.” But this declaration by the FT highlights the perils of letting a headline-writer do your thinking for you. It’s what I call “arguing a screaming conclusion.” And a wrong conclusion at that.

Oil Demand – Down, Then Up

But let’s move past the headlines. The Financial Times article explains that the World Bank has just issued a new study. The World Bank believes that the world is entering into the toughest economic times “since the Great Depression.” Thus overall world oil demand may fall by about half a million barrels per day in 2009. That’s what the World Bank states in its report.

Only half a million barrels? Heck, the total world demand for oil in the past year was about 87 million barrels per day (a fact that the FT article fails to note). By comparison, the Saudi oil tanker that recently was hijacked off the coast of Somalia held two million barrels of crude oil. And despite this act of piracy oil prices still fell over the next couple of weeks, even without that tanker plying its route across the deep blue seas.

So if the world experiences the next “Great Depression” (Release 2.0, I guess), a reduction in overall oil demand of half a million barrels per day is down in the statistical noise. And what the World Bank is saying about the grim future of the world economy is not the equivalent of “plummeting” demand. At least, not half a million barrels of lower usage.

Built-In Oil Demand

In both the developed and developing worlds, there’s a lot of oil demand built into the economic and social energy system. That’s what modern development is all about. That’s how the system was built over the past 100 years or so. Yes, you can wish that the system were different. You can even try to change the system – and risk collapsing it in the process.

Whatever you do, you can’t change the system very fast. To paraphrase a former Secretary of Defense, “You live in the world with the energy system you have. Not the energy system you might wish you had.” 

So at best, if you want to change things you are looking at a generational shift. If you have a generation. Do we have a generation?

What Will OPEC Do?

Let’s try looking at some different numbers. How about 7 million barrels of oil per day? That’s the amount of output that OPEC might have to shut-in if it wants to get prices headed back upwards in to the range of $75 per barrel or so. At least, that’s according to Philip Verleger, a long-time industry player as quoted recently in Platt’s industry newsletter The Barrel.

Current daily oil output from OPEC is about 32 million barrels per day. Verleger thinks that OPEC’s output ought to be more like 25 million barrels per day. There’s the 7 million barrel shift. Easy, right? It would be as if Iran, Iraq and Qatar simply stopped exporting oil. How likely is that to happen? Umm… yes. Clearly, Verleger has a radical take on things.

One way or another, can OPEC cut production significantly? Does OPEC have the discipline to manage its own affairs to cut 2 million barrels, or 4 million, let alone 7 million barrels per day? The issue is that numerous OPEC nations cheat on their production quotas. Hey, they need the money. Thus they lift the oil and sell it. Really, cheating on OPEC quotas is not a problem. It’s a tradition.

What of the Future?

Looking ahead by more than about two years, world oil demand is certainly going to grow. It almost does not matter what we do in the U.S. or Europe. When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there. Many of these young people already have a cell phone and a laptop computer. When they finish school, they will want an apartment and a car.

And at the rate things are going, the energy industry is still under-investing in the necessary systems of the future. Depletion is still ongoing. It gets back to the very basic point that every barrel you lift from the ground leaves one less barrel down there. And the overall global depletion rate is 6% at best. Maybe it’s 8%. It might be 10%. To replace that depletion, the general trend is for the energy industry to go further away, to deeper waters or more remote sites, to drill deeper wells, with hotter temperatures and higher pressures. Those little hydrocarbon molecules are just plain tough to catch.

And keep in mind that nobody can produce oil that has not been discovered. Or developed. Or for which there are no handling facilities. That takes investment, and lots of it. Which requires money and finance, which is in rather short supply just now. So there are just a few years in which the world can reorder the way it does oil, let alone the big picture on energy. 

So unless a lot of things happen – pretty soon and in the right sequence, and competently – we’re going to be faced with the prospect that there’s not going to be enough oil to go around. So oil prices are going to head back up. People and governments are going to get desperate over supplies. And much of the usual and predictable bad stuff that you’ve heard before is going to happen. Which gets back to that Financial Times headline. “Plummeting” demand? Really.

Until we meet again,
Byron King

December 16, 2008

Byron King

Prior to joining Penny Sleuth, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

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