America, Europe: Get in the back seat. Someone else wants to drive.
The realization that oil prices aren't about them anymore has been slow to dawn on Americans after a century of being the world's swing consumers. But the fact is that the world's developing economies have been outbidding the developed OECD countries for oil since 2005. Some time this year, non-OECD oil demand will overtake OECD demand, and they will stay in the driver's seat for the remainder of oil's reign as the lifeblood of the global economy.
The reason is simple: In Asia, they put eight guys on a small motorcycle that gets 60 to 80 mpg in fuel economy, or one guy and a load of boxes on a moped getting 225 mpg, while in the U.S. we drive around solo in SUVs that get under 18 mpg. So if you should wonder why oil prices remain stubbornly high while U.S. demand continues to fall precipitously, just keep the above photo in mind.
Conventional oil supply hit its peak-plateau around 74 million barrels per day (mbpd) at the end of 2004, but demand kept right on growing, pushing prices up. To increase liquid fuel supply to meet the 90 mbpd the world will demand this year, we had to turn to unconventional fuels like tar sands, tight oil, and biofuels, all of which have far higher production costs. As the old oil, with production costs under $20 a barrel in places like Saudi Arabia, depletes and is replaced by new oil with production costs over $80, the world price must rise higher still to accommodate the higher cost of production.
The consumer with the least efficiency loses in this contest. And that's us.
New cars, minivans and SUVs in China already get nearly 36 mpg and will be required to get 42 mpg by 2015, according to research cited by the New York Times. In America, we merely aspire to match China's current fuel economy by 2016.
The numbers are remorseless. The average efficiency of our existing fleet of 240 million cars and light trucks is in the neighborhood of 22.5 mpg. China will add 125 million cars to its fleet over the next five years, said Ambrose Evans-Pritchard in The Telegraph this past weekend. That's half the size of the total U.S. fleet. And those cars will get nearly twice the fuel economy that our fleet does.
From West to East
The shift in oil demand from West to East is clearly evident in the chart below.
Source: Samuel Foucher/Logi Energy LLC
OECD demand has been falling steadily since 2005, while non-OECD demand has been rising relentlessly. Non-OECD demand will overtake OECD demand for the first time this year, and it will not look back.
China and India have been primarily responsible for the astonishing growth in demand. Working over data from the EIA, I find that U.S. oil demand fell 1.65 mbpd in the five years from 2005 through 2010, while China and India's demand grew 0.96 mbpd in just one year, from 2009 to 2010. From 2005 through 2010, the growth in demand from China and India was double the demand lost in the U.S., and 1.14 times the combined demand loss of the U.S. and Europe.
Although it has pared its expectations for Asian demand growth somewhat, the IEA's February 2012 Oil Market Report shows that this imbalance will continue. In 2011, Asia's demand growth was 1.33 times the combined loss of Europe and the U.S., and in 2012, the IEA expects it to be 1.55 times as much.
My findings confirm the assertions of a very good new research note from Barclays Capital, which repeated "Asian oil demand is growing at a faster pace than markets are currently pricing in" like a mantra and warned of "significant upside demand risk." The demand shift from West to East has escaped the notice of many analysts, they surmise, simply because the data is so much more readily available from the U.S.: "The difficulty for the market is that data flow is fastest and most detailed in the weaker spots, while it is slower and less comprehensive in areas of runaway demand strength. This often creates false illusions about the state of global demand, and current commentary on demand and inventories seems to point to exactly that." [Emphasis mine.]
One notable exception to the general OECD trend is Japan, as they seek to replace the lost power generation from their crippled nuclear fleet with oil. The Barclays analysts note that Japan's year-over-year oil demand growth was 0.43 mbpd in December, and that oil input to Japan's utilities is up 117 percent in January from a year earlier. They estimate that global oil demand will rise by 1.04 mbpd in 2012, slightly lower than the IEA's estimate of 1.16 mbpd.
It would be a grave error to assume that new supply from expensive and slow-scaling unconventional sources can meet 1 mbpd of new demand this year, and the next, and the next on into the future. Remember, total "tight oil" production in the U.S. in 2011 was just over half a million barrels per day, and it took about 7 years and thousands of wells to achieve. We're not going to slake the thirst of the Red Dragon by the thimbleful of shale oil.
The shocking outlook for exports
Further, this new demand trend is already structurally baked-in. There is really nothing that America can do about it other than to consume less.
The sheer numbers of the global population using oil more efficiently will doom us to being the buyer of last resort under virtually any U.S. fuel economy standard. The roughly one billion people in the U.S. and Europe combined are now competing for oil with four billion people in Asia and over one billion more in Latin America, the Former Soviet Union and the Middle East. It's like a tug-of-war with five people on one end of the rope and one on the other.
And those five people want to enjoy a much higher standard of living. Tweeting from the CERA Week energy conference this week, AP energy reporter Jonathan Fahey quoted the chief economist of ConocoPhilips as saying that the world middle class is now growing by 8 million people per day. There are 2 billion of them today, he says, and there will be 5 billion by 2030.
Of those people, the ones that should concern us most are not new consumers in Asia, but the 1.4 billion people climbing the socioeconomic ladder in oil exporting countries. They are consuming more of their own oil production every day, and eventually, perhaps around 2018 - 2020, they will realize that they need to curb exports deliberately to meet their own needs.
Consider this chart of the top five net oil exporters, who make up 75 percent of the world's exports. Their exports have been declining since 2005, and on current trends, global oil exports would fall to zero in 16 years.
Source: Samuel Foucher/Logi Energy LLC
Of course, exports can fall to zero in theory only, not in practice. In reality, high prices will kill the most inefficient, unsubsidized demand first—in the U.S. and Europe. Next, demand will be curbed in net exporting countries, first via the removal of domestic fuel subsidies, and then by world prices. The demand of the four billion people in Asia will be the last to go because they use it most efficiently.
We should disabuse ourselves of the notion that Americans can adjust to emerging markets demand and declining exports by simply buying more efficient vehicles. First, at the 2011 U.S. sales rate of 12.8 million light vehicles—a rate which will not hold in a scenario of declining fuel supply and increasing economic pain—it would take 19 years to turn over the fleet. Second, our fuel economy simply isn't improving quickly enough. The vast majority of our fuel economy gains were made from in the late 1970s through the early 1980s. From 1995 to 2009 (the most recent data available from the U.S. Bureau of Transportation Statistics), the average fuel economy of the U.S. fleet improved by just 12.4 percent for cars, and 0.2 percent for light trucks. By the time we replace just half of our fleet, a larger number of far more efficient vehicles elsewhere will be competing for diminishing exports and driving prices beyond our pain threshold. In the race for fleet efficiency, we will always lose to Asia. In Wall Street parlance, they'll be buying our margin liquidation.
The conclusion should be obvious and indisputable: We'll just hand over the keys. As I said last October, OECD economies should expect growthless stagnation at best. Oil has become a zero-sum market where the developing world's gain will be the OECD’s loss. It's time we woke up to the new reality of oil demand and acted accordingly. Not by imagining that we'll be running more than 240 million slightly more efficient vehicles in the future, but by transitioning to rail and retiring them altogether.
Photo: Overloaded motorcycle in Vietnam