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Demographic Oil Demand and Peak Oil Andrew McKillop Founder member, Asian Chapter, Internatl Assocn of
Energy Economists Former Expert-Policy and programming, Divn A-Policy,
DGXVII-Energy, European Commission Introduction Since the
time of Malthus and Ricardo (around 1810-20) and as also investigated by Engels
and Marx (in the 1850s and 1860s) economists have taken an interest in mass
consumption trends and patterns, and their determinants. Oil, gas and coal
consumption is most certainly a mass consumption phenomenon, but the
implications of very clear – even stark – recent trends for world
oil demand seem to go unnoticed. Due to
fast expansion of world natural gas output since the 1980s, and a much more
recent and dramatic recovery in coal production (since 1995, and especially
after 2000), together with growth of nuclear-origin electricity in a very few
countries, the net impact on world energy has notably included shrinking per
capita average oil consumption through about 1980-2000. In addition, and likely
more important as the real cause of this long-term fall in per capita oil
demand, was the trend of low or declining economic growth, and low oil prices.
The fall in world per capita average oil demand was significant, at about
14%-16% since 1975-1980, leading some analysts and writers to claim this trend
has continued to the present. This is controverted by the simple evidence that
certainly since about 1999 per capita world average oil consumption is
increasing. This recovery, after a long decline through about 1980-2000, has
strong implications for potential oil demand, and potential annual growth of
world oil demand as we enter the period immediately preceding ‘Peak
Oil’ or the likely maximum sustained rate of world oil production. The
peak is likely to be not significantly above 90 Million barrels/day (Mbd)
despite many claims by some oil majors, and some energy or economic agencies
(such as the OECD secretariat and the IEA) that production "can exceed 110
Mbd" within the next 10-14 years. Explaining the fall of per capita oil demand It is
first useful to note the large and rapid fall that occurred in world per capita
oil demand (PCOD), following an equally rapid rise in PCOD from the period of
about 1960-65, that continued to at least 1977. See Table 1, below Table (1) World per capita oil demand 1971-2003
Population
data/ UN Population Information Network (year average or
« June » population estimate) World
daily average oil demand each year : BP Statistical Review of World
Energy, various edns. Peak annual oil price for light volume crudes and price
deflator, and forecast peak price for 2004, by A McKillop One major
and very clear conclusion from the above is that there is absolutely no
‘automatic price elasticity’ of world oil demand due to rising or
falling year-peak oil prices. If there is any ‘price elasticity’,
as most fit-to-print oil ‘experts’ and economists would like to
claim, the lag element is either very large, and/or ‘price
elasticity’ only works in one direction – that is world PCOD does
not recover when prices fall, but does fall when prices rise ! We could just as
easily argue, and have the benefit of being much closer to the truth, by
observing that world PCOD tends to rise when prices rise, and stays high, or
only falls slowly when prices remain high. That real
factors and trends explaining the decline from a peak in the years 1975-79 of
about 5.5 barrels/capita/year (bcy), to a low of about 4.5 bcy in the period
from about 1984 to 2001 include the fact of low, and sometimes long-term
declining economic growth rates for many low-income countries, and certain OECD
countries (most Eurozone countries and Japan). In this latter group of
countries the trend of ‘delocalisation’, that is
de-industrialisation (‘exporting’ oil consumption to newly
industrialising countries), and increasing electrification of the energy
economy also slowed recovery of PCOD, or continued to reduce apparent national
oil consumption per capita, through importing energy-intensive, oil-dependent
consumer goods from other countries. It is however useful to note that continued
slow economic growth and de-industrialisation of most OECD countries no longer
‘translates’ to stagnant or declining oil demand, but to increasing
demand, for a variety of technical, economic and societal reasons. This is
particularly the case in the ‘re-industrialising’ East European
member states of the EU, and in the One cause
of low economic growth rates through about 1985-2000 was in fact the overall
depreciation of "real resource" prices, that is world average prices
for oil, gas, minerals, metals and agrocommodities. In many ways this trend is
‘self-correcting’, for example through continued non-renewal of
industrial capacities and ‘benign neglect’ of the primary product
sector by institutional investors and state agencies and entities. This trend
always leads to ‘supply pinch’ or insufficient capacity whenever
economic growth recovers, marked by very rapid rises of primary product prices,
and notably oil prices. There is no doubt that maintaining higher economic
growth rates is a major target in OECD economic policy and governing party
circles, and a key element deciding the G W Bush administration’s
re-election ‘go for growth’ campaign, featuring huge increases in
already extreme US federal and trade deficits. Economic growth is also vital to
nursing world stock exchanges in their long, slow and hesitant recovery from
their near meltdown of 2000-2002. For the moment, therefore, there is
relatively little likelihood of any policy-decided or ‘spontaneous’
fall in world or regional economic growth rates, that would rapidly decrease
world oil demand and the trend of increasing world PCOD. Continued and ‘surprising’ economic growth It is
likely that the real economy, and specially at the worldwide or global level is
somewhat healthier and more robust than many commentators claim, for example
claims made by US Federal Reserve chairman Greenspan (most recently on
September 8) that "high oil prices depress economic growth" by acting
as a sort of ‘energy tax’. One major reason to conclude that world
economic growth is strong is because world trade growth (value of merchandise
trade) in late 2004 is now running at an average rate of around 15%-per-year.
This is one of the highest rates recorded in the last 20 years. Another clear
and simple indicator of strong undelying growth of the world economy is
‘surprising’ growth of world oil, gas and coal consumption. Another
factor underpinning world economic growth, but disputed by many fit-to-print
‘experts’, is increasing prices for oil, natural gas, LNG and coal,
entraining price rises for metals and minerals, and certain agrocommodities,
leading to rapid increases in world solvent demand and to rising world
liquidity. Through
the coming 2 to 3 years, notably due to slow recovery of Iraq’s oil
production and export capacities, and increasing geopolitical uncertainty in
the Middle East and Russia, there is increasing likelihood of "oil price
spikes" to well above 75 US dollars-per-barrel (USD/bbl). While the
‘supply side’, overall, is characterised by slow and hesitant
growth and increasing uncertainty, the demand side only shows strong or
‘surprising’ growth. This will almost surely continue until and
unless a very strong and worldwide economic recession occurs. The basic cause
of ‘surprising’ growth of world energy and oil demand is the
recovery or renewed rise in world PCOD. This new and recent trend is now clear
in the figures (see Table 1), but world oil demand in fact started to show an
underlying trend of renewed growth by as early as 1995-1996. The net result is
a dramatic reversal of what has been called the ‘long term trend of
energy demand growth’, described by certain oil majors such as BP Amoco,
and agencies including the IEA as ‘about 1.4% per year on a 10-year
basis’. In the 2003 and 2004 editions of BP’s ‘Statistical
review of world energy’, and in many recent reviews, statements and
communiqués issued by the IEA, it is now clearly admitted that world
energy demand is now growing at well above 2.75%-per-year. World oil demand
growth is the lead element of this trend, and is presently (on a base of Sept
2003/Sept 2004) running at close to, or above 3%-per-year. This is the highest
growth rate recorded since the early 1980s, despite the recession prone status
of several Eurozone countries and Increasing PCOD and oil supply pinch It is
easy to calculate what level oil demand would attain if today’s PCOD
recovered the most recent peak value of about 5.5 bcy. World oil demand in late
2004 would not be the actual rate of around 82.5 Mbd, but would be running at
about 34.5 billion barrels/year, or well above 97 Mbd. There is no certainty
that world oil demand will ever attain 97 Mbd on a sustained basis, including
oil from all sources (i.e. deep offshore, tarsand, heavy oil, etc. as well as
so-called ‘conventional’ oil). This is particularly sure because of
flaccid and hesitant increases of exploration and development effort, despite
‘record high’ oil prices. Taking
net losses of world oil supply capacity through depletion at around 1.25-1.5
Mbd each year, as estimated by ExxonMobil Exploration’s chairman J.
Thompson, present demand growth of about 2.5 Mbd annual requires new
production, or increased existing capacities of well above 3.5 Mbd each year.
In the absence of this, oil markets cannot avoid being exposed to
‘structural supply deficit’. After the peak of oil production is
attained, probably well before 2008, structural supply deficit will become
permanent unless demand is cut or substituted by other energy sources. The
impacts of this supply pinch or garrote will be strong and multiform on oil and
energy prices and economic growth, on energy and economic policy, and have
inevitable impacts on international development and international relations. Given the
historical economic reality of ever-growing PCOD in the richer OECD countries
through their long period of high economic growth and rapid urbanization
(roughly 1948-1975) it should be no surprise at all that exactly the same trend
is now occurring in China, India, Turkey, Brasil, Iran, Pakistan and other
fast-growing, industrialising countries. Due to the huge combined population of
these countries there is essentially no upper limit to their oil demand
potential. This can be expressed in a very few figures by taking current PCOD
figures for China and India (about 1.45 and 1.2 bcy) and comparing these with
the PCODs of the USA, Italy and France (about 25 for USA, 10.7 for France, and
12.5 for Italy). If we assumed that Demographic rate and world oil supply Forecasts
by the US DoE, US EIA and the OECD’s IEA projecting world oil output at
110 or 120 Mbd by 2020 are simply based on assumptions that very large, so-far
undiscovered reserves will be found, proven and developed, especially in deep
offshore ‘provinces’ or regions. In addition, vast increases in
production and exports from the While
demographic demand (average per capita consumption) is around 25 bpy in the
USA, and around 12 bpy in Western Europe, it is below 0.75-1 bpy in low income
countries, including such oil exporters as Nigeria, Angola, Chad and Sudan,
while in Indonesia the country’s low PCOD (below 1.5 bcy) is the only
reason that Indonesia remains – for a short while longer – a net
exporter of oil products. An increase of even 1 bpy of domestic oil
consumption, to rates of around 2-2.5 bcy (one-tenth the China’s
oil demand growth is averaging around 9% annual, and oil imports are tending to
increase much more rapidly, due to declining domestic production (import growth
has exceeded 30%-per-year since 2002). Current oil consumption in The above
trends and factors, and the world wide trend towards economic globalization,
all indicate very high, almost unlimited potentials for increase of world oil
demand. The case of the two giant industrialising economies – ‘Lifeline’ oil supplies in developing countries Outside
the OECD group and the ‘traditional’ NICs (eg. Recent
and continuing World Bank and IMF-approved policy applied by governments in
most low income oil exporter countries, for example Nigeria, result in domestic
oil prices being racked up to around 35-45 Euro cents/litre (around $75/barrel
for persons with average per capita incomes 25 times below EU-15 averages).
This short-term policy aims at strangling or reducing domestic oil demand, to
maintain or increase export volumes, and usually leads to vigorous street
protest, strikes, civil disturbance and death or injury of many persons. In Increased
rural poverty in already very poor countries can only intensify already fast
urbanization in these countries where one urban citizen inevitably consumes, or
generates 1.5 times or more fossil energy demand than one rural person. OECD
oil importers will finally not benefit from increased misery and deprivation,
and environment and species destruction in poorer countries, because world oil
demand and oil prices will necessarily be bid up by this worldwide economic
trend of urbanization in poorer countries, that is accelerated by rural poverty. In
the case of Nigeria, heavy subsidization of cooking kerosene and vigorous
agricultural and rural development, to stem the rural exodus, would greatly
improve the chances of this country heading off almost certain economic crisis
and even civil war. The sequels of poverty-induced civil strife and war in low
income oil exporter countries necessarily include ‘denial’ of cheap
oil supplies to the OECD importer countries. Global economy restructuring and world peak oil production World
peak oil production capacity may be as little as 87-90 Mbd, according to some
oil geologists and experts such as W Youngquist, C J Campbell, K Deffeyes and
others. To accommodate a near-term peak for world oil production it is very
hard to argue for ‘business as usual’ growth of the world economy.
This contradicts so-called ‘political reality’ because real
economic conditions for most countries of the OECD group are recessionary, or
‘recession-prone’ despite (or because of) large or even huge
government finance and trade deficits. In the case of the USA federal
government finance, and national trade account deficits are at all-time highs,
while economic growth is at best hesitant and unsure. In such conditions there
is obviously official concern for consumption-based economic recovery and
growth, presented by government-friendly media as ‘popular
expectations’. Outside the OECD bloc the new NICs including China and
India show continuing fast and ‘classical’, oil-based economic
development. Only the increasing number of ‘low performer’
economies, mostly but not exclusively in Africa, show consistent stagnation of
their oil and energy demand, indicating that on a worldwide base there is
little or no spontaneous movement to, or capacity for delinking economic activity
from fossil fuel burning, except through economic rout and collapse. With
world oil demand increasing at a probable ‘new long term rate’ of
about 2.75%-3.3% annual, we get to 88-90 Mbd by 2007-2008. It is therefore
necessary to develop scenarios where de-integration or reverse globalization of
the world economy can occur, with continued economic growth but at lower rates
in the developing world, and economy restructuring in the OECD group, to
accommodate this oil production capacity ceiling. This ceiling may be porous or
flexible, due to a leap in tarsand or bitumin-based oil production, and
gas-to-oil conversion, but both of these ‘ceiling modifiers’ need
much higher oil prices and plenty of lead time to start producing large
quantities. Economy restructuring, conversely, can start anytime. This treats
the demand side of the equation rather than trying to resolve emerging supply
gaps and can be pursued without necessarily being based on ‘demand
destruction’ and therefore economy destruction. This
restructuring can or could be linked to Kyoto Treaty undertakings for
‘capping’ carbon dioxide emissions, notably through planned
reduction or stabilization of oil, gas and coal burning. It will almost
certainly be easier achieved with realistic oil and gas price levels, neither
extremely low, or extremely high, in the entry period to transition. Alternatively,
if we go with the free market and laisser faire economics, we can wait for oil
depletion signals to cause runaway price rises, triggering defensive interest
hikes in the OECD bloc leading not to economic recession, but long-term
economic depression similar to the 1929-36 period. Entry to long-term
depression would surely cut world oil demand growth to zero, but actual
contractions in demand might not become significant for some years. This can be
appreciated by the ‘oil-shaving’ impacts of the 1980-82 recession,
which was second only to the 1929-31 entry to, or slide into the Great
Depression by the rate at which activity, business profits, employment and
trade was slashed. As shown in Table 1, the 1980-82 recession yielded
‘only’ about 9.6% less oil demand at the world level over 3 years.
After peak oil it is likely that world oil supply will fall at up to 3%-3.5%
annual for several years, and then accelerate to much higher annual rates. Policy and strategy response to Peak Oil The
coming peak of world oil production is dismissed or denied by organisations
such as the OECD IEA, the US EIA, and UN agencies concerned with economic
development. However, the fact of
depletion is by necessity admitted for oil and gas production in several
regions and provinces. In particular the now very fast rates of annual decline
in production of North Sea oil, and the steady decline in US lower-48 oil
production, resulted in an 801,000 barrels-per-day loss of oil production by
the USA, Norway and UK (the 3-largest OECD oil producers) in the 12 months from
June 2002-June 2003. US and Canadian natural gas production is now openly
admitted to be declining, by no less than Alan Greenspan, with inevitable large
increases in gas prices, which by ‘contagion effect’ tend to lever
up oil prices. The hope for large increases in Canadian and Venezuelan tarsand
and bitumin-based oil production is contradicted by the huge costs and slow
progress in Alberta’s syncrude projects, and continuing slow growth, or
even loss of some Venezuelan heavy crude production capacity. Without
much higher oil prices, no transition to necessarily higher priced oil, nor
market triggered development of non oil energy sources, will seriously commence
or take place. In addition, the restructuring of the economy and energy economy
will likely be chaotic if no action is taken to head off the prospect of not
much above 90 Mbd being producible by 2008 or before. The ‘strategy’
of benign neglect to rural poverty in most low income countries, including oil
exporters, is unlikely to ensure large exportable surpluses of crude from such
countries. Both the oil price factor, and urbanization, as well as population
growth will tend to shut off and reduce exportable surpluses. Not
admitting or planning for easily described oil supply constraints of course
underlies the Middle East context of the Iraq War. Iraq was or perhaps still is
supposed to have the capacity to produce more than 7 Mbd, and export over 6 Mbd
by about 2010, according to some analysts such as D. Yergin of CERA. This would
give about 3.75 Mbd more than Iraq was exporting before its military occupation
by the US and UK. Related to current and evolving world oil demand growth
trends, as discussed above, this 3.75 Mbd net addition spread over 7 years will
do less than nothing to head off the structural supply deficit that is rapidly
emerging. Other solutions, based on OECD economy restructuring, increased
North-South cooperation, and faster development of renewable energy will be the
only sufficient ways to head off the coming oil price and oil depletion shocks. Conclusions Whatever
the emerging limits on supply of oil and gas, the fact of potential demand
being almost open ended is underlined by world PCOD rates and trends. World
PCOD fell about 14% in the 15-18 years following 1981, but since 2000, at the
latest, world PCOD is now in a ‘catch up’ recovery phase. This
makes the possibility of physical supply deficits becoming ever more possible
in the coming years, and ever more certain by 2008 or at latest 2010. Increasing
oil and gas prices, up to levels of USD 75 or 90/bbl that will certainly be
called ‘extreme’, will not in fact choke off demand. The likely net
impact, in a context where extreme interest rates are not decided and applied
will be further increase of world oil demand. This ‘perverse’
impact of higher prices will therefore tend to reduce the time available for
negotiating and planning energy and economic transition. Only at genuinely
‘extreme’ oil prices, well above USD 100-per-barrel, will the
pro-growth impact of increasing real resource prices be aborted by inflationary
and recessionary impacts on the world economy. Under
almost any scenario, as well as for environmental and resource conservation
reasons, it is increasingly difficult to project ‘growth as usual’
scenarios for the world economy, if only because of the near-term potential for
runaway oil and gas price rises which themselves will firstly increase economic
growth. Increased local self-reliance or ‘autarky’, and
de-globalization will necessarily feature in longer-term restructuring of the
world’s energy and economic systems. The sooner that frameworks and
structures for managing transition can be set and agreed, on a world wide
basis, the more fossil energy resources can be retained for smoothing
adjustment in the necessarily long-term projects and programmes that will be
needed for achieving sustainability. Making
the case for energy transition and sustainable development is difficult, if not
impossible, with political leaderships in the richworld drugged by the
irrational slogans of ‘New’ Economics and so-called globalization.
The likely, near-term oil spikes and shocks due to emerging supply deficits
(which also apply to natural gas) may break the policy stranglehold that has
descended like night on serious study, and action. (copyright
Andrew McKillop e-mail address xtran04@xxxxxxxxx) Do you Yahoo!? |
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