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U.S. Energy Independence versus the rise of Chinese household and industrial oil demand

(Originally written in 2012) We maintain that our claim that US energy independent by EIA are misleading. On the contrary, import costs for foreign oil m be the same in 2020-2030 as today.

Update 2015: OPEC claims that there is still the chance of $200 oil in some years, because new projects are cancelled.

 

Over time this could become a problem as oil fields around the world naturally decline by an average of about 5% per year. As we see in this chart from a Chevron Corporation (CVX) investor presentation, in order to overcome this decline oil companies need to develop about 200 billion barrels of oil supplies over the next decade and a half just to meet demand.

crude oil

These supplies will require the industry to invest $7-$10 trillion. However, with the big capital budget reductions oil companies have announced this year it could make it harder for the industry to meet future supply needs. In fact, the industry might defer up to $150 billion oil projects this year due to the collapse in crude prices. Many of these investments, however, wouldn’t have yielded actual production for a couple of years due to the long lead time of major projects.

 

Update 2014:

Several factors stopped the continuous rise of the oil price. Like currencies, also oil has it big ups and big down. This invalidated our thesis at least for now.
Reasons on the supply side:
OPEC does not cut output any more to promote prices. They increased supply and destroyed prices.

Reasons behind that for us:
Increasing production in Libya and Iraq despite political unrest.
OPEC wants to drive shale oil producers out of the market.
OPEC wants maintain income from oil so that OPEC countries can cover their fiscal needs. Instead of hiking prices they increased quantity.

Cheap oil and OPEC fiscal need

(Originally written in 2012) We maintain that our claim that US energy independent by EIA are misleading. On the contrary, import costs for foreign oil will be the same in 2020 as today - Click to enlarge

Demand side:
Very slow global growth.
Slowing of global real estate investments, in particular in China.
Slowing growth for industrial production due (over-) capacities in particular in China.

The future will show if rising Chinese and Indian household demand for car fuel or similar will offset slowing oil demand for industrial production and construction.

 

gas station dance

see on You Tube

 

The expected “U.S. Energy Independence”

 

The IEA released a report announcing the U.S. would become “all but self‐sufficient” in terms of energy use by 2035 “thanks to rising production of oil, shale gas and bio energy, and improved fuel efficiency in transport.”

The IEA projects U.S. oil production will rise to 10 million barrels per day (bpd) by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035, according to Reuters

…. The only explanation, he said, is that Canada fills the void — but that’s not clear from the current presentation, he said…..

1) Of that 10 million bpd number, about 2 million is liquids. Meaning, there could be roughly 8 million bpd of crude oil available for refineries; while some liquids will make its ways into refinery complexes, they are predominantly feed stocks into other industries and show up as part of the total petroleum mix of the U.S.

2) U.S. refineries currently demand about 15 mmbpd of crude oil. Assume that remains flat. (http://www.eia.gov/dnav/pet/pet_pnp_wiup_dcu_nus_w.htm)

source: Business Insider

.

The Chinese income growth

The lower-class in China and other emerging markets do not have the means to spend enough yet. A large part of the 3000 US$ average Chinese salary goes into strongly rising rents and food, with 20% becoming savings. A real middle-class with spending power does not exist yet, but will emerge in the next ten years.

China Disposable income 1980 - 2010

China Disposable income 1980 - 2010 - Click to enlarge

 

Net Imports of Oil US China Europe Japan

Boston Consulting Group speaks of another 160 million people in China, people who possibly do not possess a car today. But will earn at least 20’000 US$ by 2020 and buy one. This will give oil prices another boost upwards. On the other side, the already falling Chinese current account surplus is poised to become a deficit.

Comparing “U.S. Energy Independence” with Chinese income growth and oil prices

 

The following table compares the growth of Chinese income data with the EIA data. Additionally we added some rather modest growth rate estimates for Chinese income between 2012 and 2035 and modest increases of the oil and gas price – at least when compared to the development between 2000 and 2010.

US Energy independence vs. Chinese income

U.S. Energy independence vs. Chinese income (sources: CNN and BCG versus EIA and historic production and consumption)

The table clearly shows that any improvement in U.S. oil production are cancelled out by the rise of the oil price. The daily costs for importing foreign oil to the United States will be the same in 2020 as in 2012. By 2035 the costs for importing oil to the U.S. will nearly double.

Remark: As opposed to U.S. and Canadian production that is priced mostly in the cheaper WTI or the cheaper Canadian WCS benchmark; imported, especially shipped oil is usually based on the Brent oil price).

billion barrels imported Total costs in bln. $ (incl. Transport) Costs per barrel (incl. transport) avg. WTI Price avg. Brent Price
Jun-13 0.296 30.5 103.04 95.61 103.19
Dec-12 0.318 34.8 109.49 88.25 109.20
Whole 2012 3.9 434 111.28 94.15 111.68
data via pickensplan.com and investing.com

 

 

 

 

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
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