Monday 9 December 2013

Developed Economies (formerly) Falling Consumption: Stagnation or Efficiency?

We'll probably have to wait a few more years before we can make a confident pronouncement but in the following Platts article the data seems to suggest, as I speculated in this post, that the decline in developed world oil consumption was more due to economic decline/stagnation then efficiency gains and substitutions.

The article is suggestive of some other interesting trends, namely the slowdown in China's and the developing world's consumption growth. ** Notice, that's slowdown in growth, not a decline.**

This certainly goes against the trend I'd expect over the long term. So this data would leave me 1-1. However, they both could simply be short run phenomenon and I could be 1-1 in the other direction.

Here's the article:

US oil demand growth to surpass China for first time since 1990s: Goldman Sachs:
The bank said China's oil demand growth had slowed to just 230,000 b/d year on year from January to October because of its stable GDP growth and moderation of industrial production gains. 
Overall oil demand growth in China is expected to average 267,000 b/d this year, down from 417,000 b/d last year.
JUST 267,000 b/d growth. The drop is certainly significant, but we still have a very poor country soaking up significant volumes of oil from the market.
US oil demand had been in decline since 2011, but recent data suggests oil demand growth stabilizing this year. In September, demand increased by over 1 million b/d year on year, the highest level since January 2001, resulting in US oil demand in Q3 expanding twice as fast as China's, Goldman pointed out. 
This was driven by a combination of a pick-up in US economic activity, a limited number of tropical storms, a slowdown in energy efficiency in the transport sector and lower fuel prices, Goldman said. 
Oil demand growth in the US this year is expected to reach 343,000/d, compared with a contraction of 407,000 b/d in 2012, according to Goldman's forecast.
It will be interesting to see where demand levels return to. I don't think it would be surprising to see it settle in below the 20.8+ Million BOPD level it peaked at in 2005, but it will be interesting to see if this has any impact politically.

Remember all of that peak demand self-congratulating going on south of the border? If the production-consumption stops shrinking, does that change the tone of the Keystone conversation? What would happen if the shales start their decline earlier then expected?

Back to the article:
It predicts that this resulting "resource rotation" back towards a market driven by developed economies will continue over the next two years as China embarks on substantial structural reforms and other key emerging countries such as India and Indonesia deal with domestic slowdowns.
I think China is pretty well positioned to grow it's consumption levels, but minor ups and downs are inevitable. Similar to an economic slowdown to a new normal growth range around the 7% marks, at some point the oil demand growth must level off or fall. Does this data mean it's happening now? Perhaps, but I wouldn't count on it. We'll just have to wait and see.

The recent reforms in China, indicate that consumption growth will be a focus going forward. Expect to see rising deposit rates and increasing investment options that should put more cash in the hands of consumers. Oil consumption will rise along with other consumer products. Per capita consumption has no where to go but up. Perhaps a different product mix will be required, but I'd be pretty willing to bet that over the next 10 years China will remain the driving force behind the demand side of the market.

The article continues:
All this resulted in non-OECD oil demand expanding by 220,000 b/d year on year in Q3, only 90,000 b/d more than in OECD countries, Goldman said.
The article suggests that it might be the weakening currencies of the developing world (relative to the USD which oil is predominately traded in).
Along with India, Brazil, Turkey, South Africa and Indonesia -- which collectively accounted for 9.5 million b/d of oil demand this year -- have also devalued their currencies by double-digits since the start of the year and further depreciations of between 10%-30% are likely to come.
 All of this leads me to wonder how a move by China to increase the volume of oil traded in Yuan would impact this dynamic.

With the Shanghai Free Trade Zone coming into being, reports like this report on Reauters last month discussing the intent to price at least some of the future contracts in Yuan.

This probably isn't a short run solution, since it is quite plausible that the Yuan is likely to appreciate relative to the USD. However, diversifying that currency risk seems like a prudent move for developing countries over the next decade.

But trying to determine the dominating impact is not clear. What would cause USD appreciation? Most likely would be


  1. Peak oil is not "Dynamic", but Static. Further, the dynamic effect of peak oil will be economic.

  2. Depends how you define it. I'm less concerned with the physical peak, and more interested in the dynamic preceding it. Hence the title. I think the second sentence gets to what I'm saying.