Summary
The IHS and Cambridge Energy Research Associates expect crude oil demand to grow in 2010 for the first time since 2007 and return to pre-recession levels by 2012. The rebound would mark a turnaround from the largest drop in global demand since the oil crisis of the early 1980s. Oil demand dropped from a high of 86.5 million bbl/day in 2007 to 83.8 million in 2009. The last time the world experienced a severe decline in crude oil demand, nine years were required for it to reach 1979 levels.
Analysis
It is too soon to predict what crude oil demand will be for the next 3 years. It is true that Asian markets are expected to grow rapidly and if this happens (and nothing else happens), the prediction could become a reality. So what could go wrong? Perhaps the greatest threat is that U.S. financial policy will so undermine the dollar that crude oil imports cannot be paid for. For the week of October 2, U.S. crude and product imports ran at the rate of 12,166 bbl/day (O&GJ of Oct 19). At $70/bbl, that is a lot of greenbacks. Treasury will have to speed up the printing presses to get this kind of money. A drastic drop in U.S. imports driven by further unemployment and personal hardship, almost certain to happen under the existing game plan, will outweigh all of the increases from the Far East. Another factor is the threat of an onrush of natural gas and liquefied natural gas (LNG). Huge volumes of U.S. shale gas are already a drag on the market. Only seasonal demand has moved recent prices above $4/million btu. Even larger volumes of LNG from Qatar, Trinidad, Algeria, Nigeria, Western Australia Northwest Shelf and Malaysia are seeking markets. Recently published Purvin & Gertz netbacks show LNG can be delivered at Lake Charles, Louisiana at prices ranging from $0.08/million (Qatar) to $1.93/million (Trinidad). Energy legislation being considered in the U.S. Congress amounts to a tug off war between coal and natural gas interests. Whatever the final form of the legislation turns out to be, both coal and natural gas will get something. What natural gas will get may very well be a break for compressed natural gas powered vehicles (against stiff electric auto lobbying). But even without that, transportation fuel is rapidly switching from gasoline and diesel to compressed natural gas. Threatened by health-damaging particulate pollution, Beijing, China and other large cities are converting vehicles to natural gas just as fast as the manufacturing industry can respond. In the case of Honda Motors, that is pretty fast. A third factor is that no matter how much money the oil companies dedicate to exploration and production of crude oil, supply will diminish anyhow because of high depletion rates. It is much easier and far less expensive to put new natural gas on the line than it is new crude oil. In summary, there are wild cards in the deck that could impact the IHS-CERA prediction in ways not now visible but certainly looming on the horizon.
