Jetrader - September/October 2008 - 23

development off of the U.S. coastlines. There are also close substitutes such as tar sands but these only produce a little more than one million bpd today and industry analysts expect this to reach only three to four million bpd by 2025. Oil shale is another opportunity, but current production levels are miniscule, and this process faces signiﬁcant technological hurdles because the shale needs to be heated in order to extract the oil. Biofuels are a substitute for petroleum end products but a mounting global food crisis is likely to see limited incremental supply until they are produced from sources that do not touch the food supply chain, e.g., cellulosic ethanol. Based on the foregoing, the oil industry has had to progressively rely on smaller oil discoveries or new alternatives and notably by tapping into surplus OPEC production capacity. It appears that a relatively limited amount of new “mainstream” capacity will be coming online in the short term to plug the gap caused by oil-ﬁeld depletion, let alone to meet incremental demand. Million Barrels Per Day 6 5 4 3 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 OPEC Surplus Production Capacity World Production t World 88 85 82 79 76 73 Consumption Unabated Demand Growth The strongest period of economic growth in the developing world since the 1960’s brought on from continued globalization of the world economy has dramatically increased worldwide oil consumption over the past decade. Countries that are large producers of oil also showed strong demand growth owing directly to the rise in oil prices, which has had the knock-on effect of reducing oil exports to countries that are net importers. Exhibit 2 illustrates the percentage rise in worldwide oil consumption since 1998 broken down by OECD1 countries and non-OECD countries. (Note: OECD countries are used as a baseline category since this is how data is commonly reported by the world energy agencies.) The troubling factor is that oil demand increased substantially at the same time that prices increased by more than 450 percent to an average price of about $70 per bbl in 2007. have led to sharply increased usage of petroleum products at the consumer level owing to demand for motor vehicles and the like. That the U.S. has less than ﬁve percent of the world population but nearly 25 percent of the global demand for oil is a calculus that is undoubtedly fueling fears of unsustainable demand growth as the economies of the world’s largest population centers continue to rapidly grow. This fear is captured in Exhibit 3 by illustrating world demand for oil if demand grew to per capita levels of OECD nations excluding the U.S. or per capita levels of the U.S. Under those scenarios global consumption would accelerate from one billion barrels of oil every 12 days to one billion barrels every ﬁve days—or two days, respectively. While these may be viewed as highly improbable scenarios, the combined populations of China and India alone are equal to one third of the world total and these nations have been experiencing strong economic growth for many years; moreover, the illustration assumes no further growth in the world population from 2007 levels. Exhibit 3: Actual & “Potential” Oil Demand Based on 2007 Population Levels2 Outlook for Oil Prices The factors likely to be the leading drivers of oil prices for the foreseeable future are the state of % Increase in Demand 40% 35% 30% 25% 20% 15% 10% 5% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Non-OECD World OECD % Change in Avg. Oil Price 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% During the past several years the level of demand in the OECD economies has waned because these economies as a whole are more developed and thus less resource intensive, have a large base of discretionary demand—which is more price elastic by its nature—and have had slower economic growth than many of the larger emerging economies. Conversely, in the non-OECD countries the growth in oil consumption has continued unabated because these economies have had relatively higher growth rates and are generally more resource-intensive in nature. Moreover, their rising “middle classes,” Jetrader 23 % Increase in Avg. Price per bbl Exhibit 2: Percentage Increase in Oil Consumption & Oil Price from 19982 Million Barrels Per Day

Jetrader - September/October 2008

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