Wednesday, November 4, 2009

Future Projections of Oil Demand and the IEA WEO

Exasperated sigh! Well there is this story in the Wall Street Journal that has also been picked up over at the Financial Times that deals with a “leak” of the predictions that will come out of the International Energy Agency next week, with their new World Energy Outlook. (Thanks, Leanan) The story begins:
The International Energy Agency next week will make a "substantial" downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world's thirst for oil.
Now this is where we start to get a little argumentative. Not because the amount of oil will actually reach 106 mbd as the WEO suggested last year, but rather because of the reasons for the actual number likely not being that high. (And there is a caveat to this – shades of Daniel Yergin – in that I am talking about fossil fuel and not what might, by then, be available from biofuels, since in that time frame algae may be a practical source of significant volume.) Every month I write a post on what is happening with the nations driving habits, and tie it into gasoline demand. The last curve shows that, even though we are have been in an economic slowdown for over a year that the nation’s driving level has already returned (on a 12-month cumulative value) to the point it was in 2004.

2 month running total of vehicle miles driven in the USA. (FHWA)

Given that a majority of the crude oil produced goes into transportation fuels, and that those demands are likely to see an increase, other conditions being equal, from the increased market for cars in Asia, initially demand will not reduce because of conservation.

Ford just announced that Chinese sales in October were 20,027 cars, up 80% over a year ago. For the year so far they have sold 188,244 cars up 40% on the same period last year. Increasingly new car volumes are being driven by sales in the emerging markets of Asia Suzuki profits are four-times higher than anticipated because of sales in India. They sold 85,415 units there in October, and a growth rate of 20%. Overall sales for the year are expected to be around 1.8 million vehicles. Part of the sales have been driven by the Indian equivalent of “Cash for Clunkers” but it is also moved by the desire for vehicles and the ability of manufacturers to now start to provide them.
Tata Motors reported a 28% increase at 22,232 units, the highest this fiscal. Ford India and General Motors India also showed significant growth in October 2009. Ford saw a 98% jump in sales at 3,458 units, primarily triggered by growth in Fiesta sales. Riding high on the success of the Chevrolet brand, General Motors India registered a record growth of 15% in sales at 7,413 units in October 2009.
The size of the demand, therefore, could have been expected, were there copious amounts of fuel to be available, or even just adequate amounts at a reasonable price, to may well have continued to increase to the level that the WEO will predict. The problem will come, not from that part of the equation, but rather from the supply side. And here, I would suspect, since I haven’t seen the report yet, that the WEO will continue to obfusticate around the issue.

To reiterate, we know that non-OPEC global production has now fairly evidently peaked and is in decline. OPEC retain the capability to increase production by perhaps 2-3 mbd, at best, and face, well within the period to 2030, the likelihood of dropping production from their major fields. The number of countries that can produce at 1 mbd now just about fits on a single slide for one of my lectures:

World’s largest Oil producers (production in parentheses is from 2004, and red highlights shows those declining in production).

I see that at the end of the article Daniel (Yergin) is finally admitting that there is a peak production coming in the future
There is a market assumption today that we will head back to the old days of rapid oil demand, but we think we are heading into new days," in which the growth in consumption will be more subdued, said Dan Yergin, chairman of IHS Cambridge Energy Research Associates.
Hard to back away from those cornucopian dreams, isn’t it, Daniel?

No, the sad fact is that the limited availability of crude is going to drive up the prices within a couple of years, so that it will be this that limits and changes demand, rather than the impacts of those driven by the desire to guard against Climate Change by moving toward a more energy efficient future. Not that energy efficiency has anything wrong with it, just that the incentive for change is going to come from an unavailability of oil at a reasonable price – so that both price and production limits will constrain use in the 2030, to levels well below those of today, rather than higher, and we need to be working on alternative replacement strategies a lot harder than we currently are. The IEA WEO will not, unfortunately, provide much ammunition for that argument, as it would appear.