Wednesday, June 24, 2009

Driving is picking up, but is that good?

Having effectively been away for a couple of weeks, as good a place to start as any, to catch back up with the current state of things, is This Week in Petroleum, which is looking, this week, both at the changing locations of our suppliers of crude, as well as noting the current status of the industry.

The opening review looks both at the change in the relative sources of our crude from 2000 to 2008, and then the more immediate changes over the last quarter as OPEC has acted to tighten supply against reduced demand. I am going to insert two of the relevant graphics here to show the changes. Following that I want to talk about changes in driving habits, not only here but also in China and India, because I begin to suspect that we are going to be significantly under-estimating the increasing demand for crude on the world market that those countries are going to be placing. That will tighten demand against supply, faster than I believe we are currently expecting, with a consequently faster ramp up in prices than DOE is currently projecting.

The first picture shows the changes in the sources of crude over the last 8 years:
Source TWIP EIA 24 June 2009

And the second the changes in imports this year:
Source EAI TWIP 24 June 2009

Currently US inputs to refineries are, while steadily increasing, down around 500,000 bd over the same time last year. And if one smooths both curves by eyeball, its seems that gasoline demand in the US is running only a little down on last year.
Gas demand through 24 June 2009, (Source TWIP.

Now if we wander over to the latest travel info from the FHWA, which is the April Report you can see that there is now an uptick in the curve over last year, and in all regions of the country travel increased, with the national average going up 0.6% (1.4 billion vehicle miles) over the same period (April) last year.
Vehicle miles travelled (Source FHWA)
The curve does not show the full uptick yet, since it is a 12-month rolling average.

So American driving habits are beginning to pick back up. This will lead to some increase in demand, but we need to add a couple of additional caveats that are likely to impact world demand, and which I have posted on before, but will briefly add back here to explain why I think that the world demand:supply situation is going to tighten faster than most believe, and thereafter why prices are going to be back up a lot faster than the Administration (among others) anticipate.

The first is the demonstrated success of the Tata Nano in India. In a country where the demand for cars has been about 1.5 million a year, this is selling at 100,000 a month. Demand for gas won’t be immediately felt since the factories are only geared to selling about that many a year, but you can be sure in a year or so that the burgeoning demand will be met, and the gas demand, from families for which this will be the first car, will also rise accordingly.

Switch over to China. The Chinese Administration is not running dual carriage ways up through river valleys because they look pretty. This is to meet the growing demand for cars, and the pathways along which to drive them. Chinese car sales are booming.
GM says China now accounts for nearly 25% of its global sales. With no end in sight to the troubles in the U.S. auto market, GM, Ford, and Chrysler likely will become increasingly reliant on China's still largely untapped market, says Yale Zhang, a Shanghai-based analyst for CSM Worldwide, an auto industry group.

"If you want to grow your overall volume, this is where you need to invest," Zhang says.

China is on track to sell 11 million vehicles this year, according to the China Passenger Car Association. That would be up 17% from 2008, and a stunning 20 times the number of vehicles sold in China just a decade ago. Zhang says this year China likely will overtake the USA, where expected sales are around 10 million units, and become the world's biggest car market for the first time.

China's 1.3 billion people "are simply wild about cars," says Michael Dunne, a Shanghai-based managing director of J.D. Power and Associates, an auto industry group. He says the surprising strength of China's auto market has been driven not just by economics, but also by a kind of psychological shift that has come with prosperity.

"There is the thrill of individual mobility, going from point A to point B in their own time, and on their own terms. But it's also an opportunity to declare and project their own success," Dunne says.
They really don’t start taking vacation in China until the end of this month and already the refineries are gearing up for the anticipated demand. And with China seeking to ensure its supply by acquiring others the world market will tighten, and the amount available for the rest of us is going to decline.

It is hard to see how this cannot accelerate the coming crisis in supply, and even more forcefully hand OPEC the keys to the world’s wealth.