Falling demand. The elephant in the room no one is talking about

[Ward Smith + 6,615]

Japan's biggest refiner closes joint venture refinery

Quote

Four of Japan’s biggest refiners have merged into two in recent years and cut operations as they seek business from a shrinking, aging population that consumes less fuel because of more efficient vehicles and gasoline-electric hybrids.

Aging population, more fuel efficient vehicles, lower imports. From a marketing perspective, Japan is an "ideal" customer. They can easily afford to pay, unlike Third World countries who have high demand but no ability to buy. The EIA keeps assuming a monotonic increase in demand, backed by nothing, no research, no reality. 

 

[Jan van Eck + 7,558]

There are (at least) two other factors to consider.  (1)  The increasing tendency towards dense urbanization, with Japan now leading the pack with the City of Tokyo, headed for the No. 1 slot at 38 million by 2050.   (2)  As the population ages, a larger percentage of that population is retired and basically stops driving, as the "work commute" is gone. 

What does surprise me about the Japanese demand decline is that there is no effort on the part of those refiners to sell product to other countries.  Clearly the high prices for gasoline in California represent a market waiting to be grabbed.  Whoever gets entrenched there will do well.  It is clear that there is not going to be any let-up in elevated California retail prices.  Oil refining, and gasoline production, is a volume, low-margin business.  The refineries have this high capital cost and, once built, the marginal cost of producing that last gallon of gasoline is quite low, just a hair over the cost of the crude.  it makes sense to refine gasoline in those refineries and ship the product to the USA. The Americans (in Cali) seem prepared to pay the big mark-ups!

[Ward Smith + 6,615]

5 hours ago, Jan van Eck said:

There are (at least) two other factors to consider.  (1)  The increasing tendency towards dense urbanization, with Japan now leading the pack with the City of Tokyo, headed for the No. 1 slot at 38 million by 2050.   (2)  As the population ages, a larger percentage of that population is retired and basically stops driving, as the "work commute" is gone. 

What does surprise me about the Japanese demand decline is that there is no effort on the part of those refiners to sell product to other countries.  Clearly the high prices for gasoline in California represent a market waiting to be grabbed.  Whoever gets entrenched there will do well.  It is clear that there is not going to be any let-up in elevated California retail prices.  Oil refining, and gasoline production, is a volume, low-margin business.  The refineries have this high capital cost and, once built, the marginal cost of producing that last gallon of gasoline is quite low, just a hair over the cost of the crude.  it makes sense to refine gasoline in those refineries and ship the product to the USA. The Americans (in Cali) seem prepared to pay the big mark-ups!

Both good points. To your first paragraph I would add that we will see much of the same in this country. Older more sedentary population driving considerably less. Not so much on the mass transit side, but I'm reasonably sure Americans would never put up with "pushers" jamming more commuters into a crowded train, even if they are wearing gloves. 

As for less expensive refined products, how? The largest refinery (and newest) is in India, where the labor is cheaper by far and the rules less… stringent shall we say?

Japan is a great bellwether because they import virtually 100% of their crude. If they're importing less, who will take up that slack? Not the US certainly, we're exporting for the first time in 40+ years. Demand is dropping (from those who can afford to buy). 

[Ward Smith + 6,615]

Supply disruption meets demand destruction

[butasha + 123]

2 hours ago, Ward Smith said:

but I'm reasonably sure Americans would never put up with "pushers" jamming more commuters into a crowded train, even if they are wearing gloves. 



My nearest neighbor and family member lives about a half a mile from my house. The nearest non family member is much farther away. The thought of living near 38 million people horrifies me. The only time I am in a crowd is when I attend a Longhorn football game. 🙄

[Jan van Eck + 7,558]

4 hours ago, butasha said:

The thought of living near 38 million people horrifies me.

Now, that's the truth!  

Here's another thought for you:  those 38 million all are producing plastic waste, and human waste, on scales that you cannot even begin to imagine.  At least in Japan, they have a handle on it.  In Lagos?  Manila?  Jakarta?  Calcutta?  Dhaka?  Ugh. 

Those tens of millions don't live "near" you; the live on top of you!  More ugh.

Edited July 25, 2019 by Jan van Eck

[Jan van Eck + 7,558]

7 hours ago, Ward Smith said:

As for less expensive refined products, how? The largest refinery (and newest) is in India, where the labor is cheaper by far and the rules less… stringent shall we say?

Market shares do not necessarily go to the lowest priced vendor; they tend to go towards the more nimble vendor with an aggressive sales team.  Right now California is out there with little pumping capacity, it buys crude from places such as Canada by tanker via Vancouver Port (BC) or via Washington State (where it is brought in by rail, also from the Bakken) and then refined inside Cali.  Gasoline is chronically short on the wholesale level, driving the prices up as more supplies are sourced.  Meanwhile the Japanese refiners are not running full tilt, so the capacity to put through some more crude and sell the gasoline to Cali is there. 

Now let's look at the costing.  Sure, India has cheap labor.  But is labor a large component of refining, or is it the capital cost of the refinery itself?  The Japanese refinery has already allocated its capital costs, and likely has recovered them in book terms.  So the actual hard costs to the refinery to push through extra crude is the cost of the oil, plus yes some labor cost, and loading into a tankship. Are the Indians out there competing with the Japanese or any other seller for Cali purchase orders?  Does not look like it.  OK, so the Japanese do with gasoline what they have so successfully done with Toyotas:  get out there and hustle for orders.  If the stuff is retailing for $4.41 and the crude component cost is 88 cents, and your refinery is already fully depreciated, hey you have the margin to go make some bucks shipping gasoline to California.  (So do the Indians, but they are not out there hustling, so you easily out-hustle them.) 

In capitalism, the prize goes to the nimble.  The Japanese have definitely learned that lesson.

[Douglas Buckland + 6,308]

On 7/25/2019 at 5:38 AM, Ward Smith said:

Supply disruption meets demand destruction

The tankers were not 'torpedoed', they were mined. If a journalist can not get a simple fact like this correct, should I assume his other 'facts' are correct?

[Douglas Buckland + 6,308]

As each country develops, their rate of population tends to decrease and they eventually attain zero population growth (or less). Large families are not required, or desired, in developed countries, for a variety of reasons.

On the other hand, developing countries will continue to have significant population growth until they are 'developed'.

Demand for energy will continue to grow as countries develop, and as they develop they will generate more of an ability to pay for that demand.

I suppose the issue is if the developing demand in developing countries will outweigh the decreasing demand in developed countries?

[Ward Smith + 6,615]

8 hours ago, Douglas Buckland said:

As each country develops, their rate of population tends to decrease and they eventually attain zero population growth (or less). Large families are not required, or desired, in developed countries, for a variety of reasons.

On the other hand, developing countries will continue to have significant population growth until they are 'developed'.

Demand for energy will continue to grow as countries develop, and as they develop they will generate more of an ability to pay for that demand.

I suppose the issue is if the developing demand in developing countries will outweigh the decreasing demand in developed countries?

I strongly suspect developing country demands will increase, but the reason developed countries don't want households with a dozen kids is because the obvious problem is those households are invariably POOR. Not just that, but overall industriousness is part of what gets people Out of their Third World status. You have to want to work, and work hard to escape poverty, or worse, dig yourself out of it. I'm not convinced many of these countries will Ever escape. Not to mention how certain countries seem to revel in their corruption, meaning that not only does the individual need to have a small family, and work hard, but ALSO, they need to escape their corrupt rulers to get ahead. 

An interesting letter on Industry by Benjamin Franklin here. 

[Ward Smith + 6,615]

8 hours ago, Douglas Buckland said:

The tankers were not 'torpedoed', they were mined. If a journalist can not get a simple fact like this correct, should I assume his other 'facts' are correct?

She's not a "journalist", she's a trader. 

[BenFranklin'sSpectacles + 762]

On 7/26/2019 at 11:45 AM, Ward Smith said:

I strongly suspect developing country demands will increase, but the reason developed countries don't want households with a dozen kids is because the obvious problem is those households are invariably POOR. Not just that, but overall industriousness is part of what gets people Out of their Third World status. You have to want to work, and work hard to escape poverty, or worse, dig yourself out of it. I'm not convinced many of these countries will Ever escape. Not to mention how certain countries seem to revel in their corruption, meaning that not only does the individual need to have a small family, and work hard, but ALSO, they need to escape their corrupt rulers to get ahead. 

An interesting letter on Industry by Benjamin Franklin here.  

I strongly suspect developing country demands will not increase - or if they do, increase little - because they will not pull themselves out of poverty.