May 29, 2008
Big Oil Producers Cut Exports In 2007
As reported by the Wall Street Journal the Export Land Model comes home to roost. The big oil producers are producing less oil.
And about one of those other big sources of economic worry, the alleged bubble in oil markets? Further undermining the bubble theory, the Journal reports that "the world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue." Citing U.S. Energy Department data, the paper says that "the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well," and that this is partly due to higher demand for oil from within the petroleum-rich Persian Gulf region.
That is really bad news. How long will Pangloss have to stay on the Turkish galley before he figures it out? (I've had to explain the term "Panglossian" to so many people lately that I wonder why I even try to be the least bit literary in my references. Still, now I can use it with a lot of people and "so I got that going for me - which is nice")
China the biggest problem? The Arabs can export less oil and make more money while doing so. Not exactly an incentive to export.
For all the attention paid to China's increasing energy thirst, rising energy demand in the Middle East may pose the greater challenge. Last year, the region's six largest petroleum exporters -- Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar -- curbed their output by 544,000 barrels a day. At the same time, their domestic demand increased by 318,000 barrels a day, leading to a loss in net exports of 862,000 barrels a day, according to the U.S. Energy Information Administration.
The Journal even refers to Export Land Model theorist Jeffrey Brown. Peak Oil continues to head into the mainstream.
Since 2004, Saudi oil consumption has increased nearly 23%, to 2.3 million barrels a day last year. Jeffrey Brown, a Dallas-based petroleum geologist who studies net export numbers, said that at its current growth rate, Saudi Arabia could be consuming 4.6 million barrels a day by 2020.
In the Export Land Model rapid growth of internal consumption by big oil producers causes available oil supplies to decline far more rapidly than global production declines. See my September 28, 2007 post Declining Exports From Big Oil Exporters Expected for a discussion of this and a link to an analysis by Brown and his writing partner "Khebab". Also see Brown's Net Oil Exports and the "Iron Triangle".
My advice: Buy only high fuel efficiency cars. Also, make commuting distances an important consideration when moving and switching jobs.
Update: If the rise in oil prices stops and backs off for a while that is because a whole lot of demand destruction is going on.
During the week leading up to the Memorial Day holiday, the traditional start of vacation season, Americans pumped 5.5 percent less gasoline than a year ago as average prices hit a peak $3.84 a gallon, MasterCard Advisors said in a report.
But US demand destruction will eventually again be overwhelmed by demand growth in Asia and the Middle East.
As I argued before, the ELM is an interesting model but it is not complete.
The oil consumption in the arab countries is subsided by the government (gas prices are under market level). They are able to make up this because they sell the remaining oil at high prices on the world markets. But they also need to sell in the world market because they need the goods other produce, like drugs, industrial tools, food, weapons, etc. With the oil prices so high, the prices of these goods will grow (look at food). So they will be forced to pay more for their imports.
So they, and us, will have higher costs and higher prices. Who will gain more? Will they be able to sustain their regimes when they will have difficult to keep the population fed.
If you fast forward a few years ahead, the developed world will change is consumption pattern and energy source.
What will happen when the higher oil prices will force higher prices on the food markets and force food to become fuel?
Will we keep the food and they will keep the oil? Will they eat the oil?
Demand Destruction - such a fancy term for "Demand is Falling"
And "overwhelmed by demand growth" - what does that mean? I think you're saying that "prices will continue to rise." Sure, the prices will rise some. But it's not like China and the Middle East are possessed of superpowers. It costs them money to consume oil (even if it is opportunity cost), and as the price rises, it presents economic challenges to them as well. I'll repeat this, for effect - China is not in possession of a magic wand that renders their infrastructure immune to increases in the price of oil. Oil price spikes will cause them to switch away too.
What we're seeing is exactly the kind of soft landing one would predict based on the last 200 years of economic analysis. The supply of oil is constrained. Prices rise. People start to switch away gradually. Prices continue to rise, but not as fast. More people switch away, faster. Prices continue to rise, but not nearly so fast. Even more people switch away. Prices level off at a fairly high level, and people continue to switch away. Eventually, the world no longer dependent on oil, the price starts to fall again, and, eventually, crash, leaving incredible amounts still in the ground.
And for what it's worth, I continue to believe (unlike Pangloss) that economic theory and the laws of supply and demand are sound. There's nothing here to indicate otherwise, and so far, we're seeing exactly the kind of switching behaviors one would expect as prices rise.
You've never explained satisfactorily - what is it about oil that causes you to believe that the normal laws of supply and demand do not apply?
Prices will rise if either demand grows or supply drops. Demand growth: I'm referring to growth in Asian demand more than making up for a drop in American and European demand. I've made this clear repeatedly across many posts.
China and the Middle East do not need supernatural powers. Conventional this-world powers have already been enough to push oil above $125 per barrel. China is industrializing and has over 1.3 billion people.
I never said that the law of supply and demand does not apply. What I've said (again and again and again) is that declining demand in the Western OECD countries is not enough to bring the price of oil down by much for long. Rising demand in China and the Middle East make the future path of oil prices different than was the case in the early 1980s. Back then a big consumer and business shift toward more fuel efficiency caused a plummeting of oil prices. But conditions are very different today and history will not repeat.
Certainly as exports fall the big exporters will coming under increasing pressure to raise internal energy prices. They will eventually raise internal prices out of necessity. But when will that happen? By that point how far will their exports have fallen?
One problem we have is that the rise in oil prices is reducing the pressure on them to raise internal prices. They are getting huge increases in export revenues even as their exports decline.
I hope readers pay attention to what jb writes so clearly.
You continue to fail to understand that the oil market is not close to perfect competition with OPEC in the mix. Prices are also partly determined by risk factors.
And if China is on an inevitable path to keep importing oil at high rates, why was the increase near 0% in 2006?
If I was one of the big US car makers, I'd be focusing on producing an Accord sized car with a 2 litre diesel engine, and aggressively marketing that as the standard US car for the next couple of decades.
That's about the average car size in Australian, and the US is going to have to get used to Australian oil prices.
The Japenese have neglected diesels in favour of hybrids, and arguably this is a big mistake, since diesels can compete on economy while providing much more power for towing, uphill driving etc.