End Game For Oil? OPEC Prepares For An Age Of Dwindling Demand

[ralfy + 55]

14 minutes ago, 0R0 said:

The issue is that you don't have the GDP growth without the demographic driver. That is why you don't get the demand growth. Japan in the 90s and Germany and China in the 2000s relied on exports to produce growth as there was some demographically driven growth elsewhere - like the US. After which Chinese pushed consumption increases domestically, which required gigantic scale infrastructure projects to absorb retirement savings of their boomer demographic and convert them into demand generation. Once that ends, there is nowhere to get growth in existing industrialized countries, including traditional EMs. The remaining demographic growth sources are countries where high upfront infrastructure has to be put up in order to employ and industrialize those countries. They lack natural advantages and in the case of Africa, they are not even remotely close to feeding themselves. On the governance front, their broad corruption prevents investment from abroad from coming in in size.

The problem is that a demographic driver isn't needed because of population momentum. Many countries still do not have aging populations, which means even with low birth rates the population will still increase considerably.

As pointed out in another thread, the only way for global population to peak earlier is "rapid industrialization" for the developing world, which means among other things major infrastructure development. But if that development doesn't take place, then there won't be high economic progress, and with that no early peak in world population.

 

[Dan Clemmensen + 1,011]

4 minutes ago, ralfy said:

It's the other way round: production shifted because of a free market.

The marginal cost isn't $35 to $40 but $50 to $90. That's why the oil industry took on around $2 trillion in debt (according to the BIS) to increase production and burned through its cash flows (plus sell assets and lay off people) when oil went down. And the fact that production shifted to unconventional production shows that.

The claim that the price of oil is "artificially high" is nonsense. The price of oil is pegged by the market and not by producers. You're mistaking price with cost.

It's quite possible that I was mistaken. I thought that the marginal cost of new production within Saudi Arabia and Iran was very low, with numbers in Iran as low as $7/bbl. The only reason the non-OPEC free market can get $40/bbl is that the OPEC cartel does not operate as a free market. The free-market producer price acts as a cap on the OPEC cartel price.

[ralfy + 55]

On 8/4/2020 at 7:15 AM, Dan Clemmensen said:

This is a very common but flawed idea. OPEC (and anyone else sitting on proven reserves) is not trying to "protect market share". They are trying to maximize absolute profit. You "maximize market share" by reducing your price, but that does not necessarily maximize your profit.

At some point (in the future?) the total proven reserves will exceed the estimated total remaining demand for crude oil, and a race to the bottom will ensue. Sources with higher marginal cost of production will be written off and P&A'ed. We have seen a small taste of this this year, with Oil Majors writing down the book value of their reserves.

Total proven reserves is a useless metric, which is why even with hundreds of years' worth of oil that can be produced conventionally the industry still ended up looking for alternatives. And that took places not because of artificially high costs but diminishing returns, which is why capex has been rising in exchange for lower increases in oil production:

https://www.energypolicy.columbia.edu/events-calendar/global-oil-market-forecasting-main-approaches-key-drivers

and with that increasing debt:

https://www.bis.org/publ/qtrpdf/r_qt1503f.htm

 

[ralfy + 55]

18 minutes ago, Dan Clemmensen said:

It's quite possible that I was mistaken. I thought that the marginal cost of new production within Saudi Arabia and Iran was very low, with numbers in Iran as low as $7/bbl. The only reason the non-OPEC free market can get $40/bbl is that the OPEC cartel does not operate as a free market. The free-market producer price acts as a cap on the OPEC cartel price.

Sorry, I was referring to break-even price and not marginal cost.

From what I remember, the oil industry needs the price to be at around $75 so that they can continue making around $500 billion in debt payments, and part of total debts which the BIS estimates at $2.5 trillion. Because of diminishing returns, they have had to borrow more for decreasing amounts of new oil produced each time. Last March, they had to raise more than $170 billion in additional debt even as prices remained low.

 

 

Edited August 5, 2020 by ralfy

[0R0 + 6,251]

47 minutes ago, ralfy said:

The problem is that a demographic driver isn't needed because of population momentum. Many countries still do not have aging populations, which means even with low birth rates the population will still increase considerably.

As pointed out in another thread, the only way for global population to peak earlier is "rapid industrialization" for the developing world, which means among other things major infrastructure development. But if that development doesn't take place, then there won't be high economic progress, and with that no early peak in world population.

 

In "Empty Planet" the demographers note that the rural world has changed in that there are cell phones that allow women to act like urban women to avoid unwanted pregnancies and coordinate medical treatment to that effect. Their last estimates of trend in the few countries where birth rates were still above 2.1 (the replacement rate) recently, that trend has sharpened downwards. The youngest nations have fallen well below 2.0 and still contracting. Kenya fell to below 1.7 and Angola is likely to have dropped as well.

That does leave a stable frontier market population that can be industrialized given negative real yields for the time being. They were not developed before because their natural circumstances did not allow for doing so profitably. So long as negative investment returns are acceptable to investors looking to real forward incomes, there is hope to be had. But I expect that those investment funds will move towards NAFTA (also France and Argentina, and among frontier/EMs to India) where a large Millennial advanced economy demographic wave is going into its peak spending period. New homes are made possible by Work From Home, thus removing the biggest hurdle to their following prior generation's path to family formation. Moving out of town means rent falls from up to 60% of disposable income to a mortgage of under 30%, while avoiding downtown taxes. It means that income inequality loses one of its main drivers in the transfer of income from renters to landlords. The current look forward in NAFTA is very strong post CV19. So will take up the investment flows first, as they can provide a positive real return locally, though far too small to have an impact on the global rates of return which will follow demographic inversions in countries producing 70% of world GDP.

.

 

[Tomasz + 1,608]

I

According to international data, whole Africa consumes today about 4-5 million barrels a day.

People in Africa also want to have a higher standard of living and its main manifestation is their own car. Cheap one so probably ICE and gasoline without additional taxes. 

So I would start with a discussion what reserves of potential oil demand are in Africa itself taking under consideration Nigeria member of OPEC has more than 200 milion people and is going to have something like 500 or even 800 milion in 2100.

II

And let me note that the price of gasoline in different countries of the world depends a lot on the degree of its additional taxation.

For example my friend who lives in north-eastern Poland, goes to Russia to the Kaliningrad Oblast once a week, where he refuels his car for about half the price.

In the USA as far as I know you also have much cheaper gasoline than in the European Union.

So it would be necessary if you want to compare the profitability of both types of car engines  to check each country separately, taking into account that this price depends to a large extent on the country's policy and every country has s a different policy

Edited August 5, 2020 by Tomasz

[markslawson + 1,058]

8 hours ago, 0R0 said:

The issue is that you don't have the GDP growth without the demographic driver. That is why you don't get the demand growth. Japan in the 90s and Germany and China in the 2000s relied on exports to produce growth as there was some demographically driven growth elsewhere - like the US.

But you can have GDP growth without big increases in population or any increases at all. Sure growth spurts in some countries can be attributed to demographic changes, but that often means the arguments shifts to complaints about how the per-capita GDP has actually declined. Granted China is a very odd case but I've been reading predictions of its economic demise for decades now and it still hasn't happened, and its still growing. However, to argue that declines in population growth will cause declines in GDP and so that will affect fuel consumption is a few economists too far. If you want to strengthen your case maybe you could look at Europe, where growth has been anemic for more than a decade and see if that affected demand - unless you're going to argue that the influx of Syrian refugees boosted car driving. Anyway, this discussion is getting strange. Good luck with your research. Leave it with you. 

[Rocketman72 + 6]

IMO the reason oil is trading at $40 a barrel today is that if you were to add $30 a barrel to the current price we would be trading at $70.... which would pretty much cover the billions of dollars lost in shale oil investments. Of course that is a simplistic analysis “ceteris paribus”. The price was hovering in the $70 to $90 range I believe.

Edited August 6, 2020 by Rocketman72

[Dan Clemmensen + 1,011]

3 hours ago, Rocketman72 said:

IMO the reason oil is trading at $40 a barrel today is that if you were to add $30 a barrel to the current price we would be trading at $70.... which would pretty much cover the billions of dollars lost in shale oil investments. Of course that is a simplistic analysis “ceteris paribus”. The price was hovering in the $70 to $90 range I believe.

I don't understand. according to the chart on the OilPrice main page, Brent crude was stuck within a tight range at around $60 for all of 2019. What are you referring to?

[0R0 + 6,251]

5 hours ago, markslawson said:

But you can have GDP growth without big increases in population or any increases at all. Sure growth spurts in some countries can be attributed to demographic changes, but that often means the arguments shifts to complaints about how the per-capita GDP has actually declined. Granted China is a very odd case but I've been reading predictions of its economic demise for decades now and it still hasn't happened, and its still growing. However, to argue that declines in population growth will cause declines in GDP and so that will affect fuel consumption is a few economists too far. If you want to strengthen your case maybe you could look at Europe, where growth has been anemic for more than a decade and see if that affected demand - unless you're going to argue that the influx of Syrian refugees boosted car driving. Anyway, this discussion is getting strange. Good luck with your research. Leave it with you. 

Europe is investing in green energy regardless of economic sense, which is increasing GDP beyond the negative growth that would have been there otherwise, and with that is also less decline in oil consumption. Their other main departure from local demand falling with aging and then declining population is the export driven economy of Germany. Nearly 1/2 of GDP from exports.

Declining populations translate to lower investment as there is no need to expand infrastructure, office space, build new schools and houses. In China it means that dorms built for 8 students per room have 4 and each gets an extra bed space to use as a closet. They are increasing the number of people going to higher education, and are opening new schools at lower academic levels because the higher end schools don't want to reduce their levels by accepting less qualified students.

I didn't say that GDP growth would be negative, but that oil consumption would shrink. GDP would grow less and MAY be negative when per capita/worker values don't rise fast enough. Experience from Japan and other countries like Greece Italy and Spain that inverted demographics earlier, shows that GDP does stagnate and falls periodically. Additionally, total factor productivity (TFP) tends to fall with the shrinking of the spending age population (30-50 in  most places). Presumably that is because of the drop in marginal economies of scale as capacity built for larger markets is left idle more of the time when the spending age population sags. Also because productivity enhancing automation is used below its output capacity because it was not intended to raise output (which it could) but to replace workers that can not be had.

It does not mean that people live more poorly, as falling demographics mean that there are fewer inheritors and more to inherit. But it does mean that labor demand will fluctuate, though generally low unemployment would persist over time where investment incomes are high (Japan), and be elevated where external or particularly successful automation investments were not made (Spain Italy Greece).

[Rocketman72 + 6]

8 hours ago, Dan Clemmensen said:

I don't understand. according to the chart on the OilPrice main page, Brent crude was stuck within a tight range at around $60 for all of 2019. What are you referring to?

I’m referring to the price before the 2015 crash sorry I wasn’t clear.

Edited August 6, 2020 by Rocketman72

[Dan Clemmensen + 1,011]

4 hours ago, Rocketman72 said:

I’m referring to the price before the 2015 crash sorry I wasn’t clear.

Thanks. However, those marginal costs were a lot higher than the current costs, as the fracking industry was forced to become much more efficient in order to survive. The process is brutally Darwinian. Investors lose out as companies go bankrupt, and new investors grab the assets cheaply and keep pumping at the marginal cost of production based on the new efficiency level.