Long Term Outlook

Over the last 30 years daily oil consumption has risen by approximately 30 million barrels, just under one million barrels per day each year, according to the International Energy Agency (IEA). In recent years, over one-half of the growth in demand has come from Asia. Asian demand— particularly China, India and South Korea—has grown by 10 million barrels daily in the last 17 years. Looking ahead, Asia is going to continue to be the engine of global oil demand growth. It is hard to see how it will not grow by at least a similar amount, if not more, over the next 17 years. In fact, growth is more likely to accelerate as Asia goes through the energy intensive stage of economic liftoff. If Asian oil demand were to grow at the same rate over the next 17 years, it will have grown by 27 million barrels per day by 2021.

To illustrate this point, you simply need to examine the potential for growth in the Chinese automobile industry. At the moment, domestic Chinese automobile demand is rising rapidly toward two million vehicles per year. There is a remarkable parallel between U.S. automobile demand in 1910 to the Chinese automobile demand today. Here are some statistics: China is producing one car for every 600 people, which equates to the U.S. automobile penetration in 1910. By 1920, U.S. car production and consumption jumped tenfold to one car per 60 Americans. If China's car production follows that same trajectory, it would equate to 21 million additional cars per year in a decade's time. That means China's automobile ownership would be about 210 million by 2015, and approaching the number of vehicles owned by Americans at 217 million. Given that U.S. gasoline consumption is about nine million barrels per day, it is easy to see how China's consumption can rise dramatically.

Based on 2005 data, the world is consuming approximately 83 million barrels of oil per day, with production at about 84 million barrels per day. That leaves a cushion of one to two million barrels per day, which typically gets lost in the event of a supply disruption, like the Venezuelan strike in 2003, the Yukos-Kremlin problem in 2004, and the Hurricane Katrina impact in 2005. I think that oil consumption worldwide, at current price levels, will reach at least 100 million barrels per day in 20 years. In fact, if my view of an increase in demand from Asia alone in the next 17 years will add an additional demand of 27 million barrels per day, then the daily demand will equate to 107 million barrels per day without any increase in demand from the rest of the world. The question is whether production will be able to keep up with that kind of demand. Not surprisingly, capacity can increase not only as prices rise to support additional production, but also as demand for oil slows with the

TABLE 1.1 Oil Demand Growth

Year

China

Asia exChina

Rest of World

Total World

2005

4.10%

0.79%

1.23%

1.39%

2004

16.88%

-2.90%

4.61%

4.40%

2003

13.84%

-4.50%

2.32%

2.01%

2002

5.78%

-0.74%

0.54%

0.65%

2001

1.58%

0.24%

1.11%

1.00%

Source: Oil Market Intelligence Numerical Data Source.

Source: Oil Market Intelligence Numerical Data Source.

surge in alternative fuels. Further, the Hubbert Curve would suggest that at some point in the next few years the oil peak will occur whatever the price of oil, meaning that year-over-year declines of production are on the horizon.

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