It's the demand, Stupid

[Ward Smith + 6,615]

James Carville famously coined the phrase, "It's the economy, Stupid" to cut into George Bush's (the first) almost insurmountable lead. What millennials don't realize is that Bush had an 89% approval rating when James crafted that slogan, and adding in "Read my lips, no new taxes", well the rest as they say, is history. 

Today there are those claiming the economy is in the doldrums, but with markets at or near all time highs, what else would traders say? They're in the business of buying cheap and selling high, and they'll happily trash every stock to give themselves a cheap buying opportunity. Right now they're selling, holding the cash and claiming the stock they just sold is worthless so they can buy it all over again. 

Nick Cunningham penned this missive  about the lack of demand growth. I'm not convinced it's the end of the world, demand growth for petroleum has grown nominally 1% per year as far back as I can find data. IEA likewise is looking at global numbers, not US and given that current consumption is 100 million bbls per day, it seems reasonable that next year will demand another million bbls, at 1% growth. Nick's breathless article calls out a SWAG from EIA of 0.9 million bbls for a YUUUGE drop off of 100k bbls, assuming their scientific wild-assed guess remains accurate through the end of the year. 

I've got an old World Oil magazine on my desk from October 2010. Page 27 shows domestic oil production almost exactly 9 years ago today of 5,393,000 bbls total US production. Worldwide demand then appears to have been around 90 million total. 2010 the Bakken was just coming up to speed, and the Permian wasn't quite a gleam in daddy's eye yet. Today we're on track to produce 13 million and between crude and finished goods, exports are 9 million bbls per day. Therefore, by itself the US has picked up the entirety of Worldwide oil demand. 

Remember too that there are roughly 194 countries in the world, but only about 80 that have the fiscal resources to pay up for oil with petrodollars. The rest have plenty of unsatisfied demand but don't really count since they effectively can't afford oil even at these currently depressed prices. Counting the rich countries, whose populations are growing at less then 1% per year, average, we can clearly see that the majority of demand increase comes A) from wealthy countries and B) is due almost exclusively to population growth. 

There's an analogue here. A friend of mine used to be an economist for a power utility. He did all kinds of fancy math with lots of statistics, but at the end of the day the utility's demand growth quite coincidentally matched oil, at 1% per year, or roughly how much the utility's population base was increasing every year. The new CEO looked at years of this guy's reports and said, "Why are we paying this guy so much?". Like a weatherman in Hawaii, he could submit the exact same predictions year after year and generally be spot on. 

Ultimately, if you're trying to predict the price of oil, predict the population growth of wealthy countries and how much more the US is likely to keep increasing productivity. If the US keeps increasing production by more than the global demand increase, oil will fall and vice versa. 

Edited September 13, 2019 by Ward Smith
Fixed ottokerrects

[Dmitry Bedin + 25]

Brilliant!

[Tom Kirkman + 8,860]

2 hours ago, Dmitry Bedin said:

Brilliant!

Agreed.

I have stated repeatedly ... :

The global demand for oil & gas continues to increase year after year after year, decade after decade after decade, despite what most media tell you to believe to the contrary.

Demand for *more* oil & gas is simply not going to go away any time soon.

[John Foote + 1,135]

2 hours ago, Tom Kirkman said:

Demand for *more* oil & gas is simply not going to go away any time soon.

Yup, but what kind of news is that? Humans as a species are wired to be afraid, so give us what we want.

Many years ago I'd watch a soap opera with my mom. So much fake drama every day. Then of course I got older and I moved away. When I came back to visit we'd watch together. Years of drama missed, and yet in two days I'd be caught up. That was an inadvertent life lesson.

The earth will overheat, the atmosphere will burn off, but in what, 2 or 3 billion years. The earth will end up being consumed by the sun as it expands and ages, but I don't that is anything we need to concern ourselves with. All of which is a short period for an astrophysicist. I won't get enough trips around the sun to see oil in decline.

And oil will decline, but something will be better and cheaper, not a lack of oil.

[J.mo + 165]

4 hours ago, Tom Kirkman said:

Agreed.

I have stated repeatedly ... :

The global demand for oil & gas continues to increase year after year after year, decade after decade after decade, despite what most media tell you to believe to the contrary.

Demand for *more* oil & gas is simply not going to go away any time soon.

I agree to a point. Demand for nat gas, I believe will continue to increase. it's the best way to achieve what its market sector is in demand of. 

Oil I believe in manufacturing and finished goods, demand will increase. 

Oil In terms of transportation use. Will begin to decrease. No problem right? Its demand increasing in other sectors. However, we all know that the transportation use of oil covers the vast percentage of overall demand. 

I may be a fear monger in that I want to be certain in my path of investment for the future as I have (hopefully) a long tenure on this planet and my income is related to the use of oil as a transportation fuel. But I am in no way banking on retiring from this sector and setting the autopilot. I think many of the older generation and I've stated this repeatedly, are set in their ways. Demand will increase because demand has always increased. This has been true for many sectors and models of business. Demand did indeed continue to increase, until it didnt. Folks were stuck dead in their tracks. Dont get complacent. Always have an escape plan, even if never used. 

[Tom Kirkman + 8,860]

4 hours ago, J.mo said:

I agree to a point. Demand for nat gas, I believe will continue to increase. it's the best way to achieve what its market sector is in demand of. 

Oil I believe in manufacturing and finished goods, demand will increase. 

Oil In terms of transportation use. Will begin to decrease. No problem right? Its demand increasing in other sectors. However, we all know that the transportation use of oil covers the vast percentage of overall demand. 

I may be a fear monger in that I want to be certain in my path of investment for the future as I have (hopefully) a long tenure on this planet and my income is related to the use of oil as a transportation fuel. But I am in no way banking on retiring from this sector and setting the autopilot. I think many of the older generation and I've stated this repeatedly, are set in their ways. Demand will increase because demand has always increased. This has been true for many sectors and models of business. Demand did indeed continue to increase, until it didnt. Folks were stuck dead in their tracks. Dont get complacent. Always have an escape plan, even if never used. 

I'm open to viable suggestions to realistic global alternatives to oil and gas.  Solar and wind are negligable as far as actually 100% replacing oil & gas (and its dirty sibling coal, which is still widely used in developing countries.)

Some on the far left seem to fantasize that US, Canada, EU and Australia will magically convert 100% to wind, solar, hydro, etc., yet steadfastly ignore that China and India continue to increase coal consumption for fuel.  Madness.

[J.mo + 165]

15 minutes ago, Tom Kirkman said:

I'm open to viable suggestions to realistic global alternatives to oil and gas.  Solar and wind are negligable as far as actually 100% replacing oil & gas (and its dirty aibling coal, which is still widely used in developing countries.)

Some on the far left seem to fantasize that US, Canada, EU and Australia will magically convert 100% to wind, solar, hydro, etc., yet steadfastly ignore that China and India continue to increase coal consumption for fuel.  Madness.

It doesnt need to be any of that. It needs to be that electrification of vehicles becomes the dominant mode of transport in a few of the dominant world economies that consume the bulk of the world's production for fuels. 

There is not a large enough market in emerging countries to absorb and begin to build out infrastructure to adopt the technology by the time its coefficient will be building out grid and infrastructure for other electrification. 

Oil will not go away. However, demand will fall indefinitely. Leaving cashflow and lack of interest to continue to develop. Which I am sure the big boys already have their reserves procured for some time to come, but are tight lipped as they are smart and should be. But this will leave to the most efficient producer, which in itself is a sticky subject so we will leave that off the table. But demand will fall. And I'd say within 10-15 years it will be noteworthy. I sure hope I'm wrong however at this moment I am not investing in any more future locations unless they are blockbuster deals. 

[Tom Kirkman + 8,860]

1 minute ago, J.mo said:

It doesnt need to be any of that. It needs to be that electrification of vehicles becomes the dominant mode of transport in a few of the dominant world economies that consume the bulk of the world's production for fuels. 

And where will all that electricity come from?

(Hint: Coal and natural gas are the most used energy fuels for generating electricity.)

 

[J.mo + 165]

14 minutes ago, Tom Kirkman said:

And where will all that electricity come from?

(Hint: Coal and natural gas are the most used energy fuels for generating electricity.)

 

I agree, natural gas I believe will continue to grow in demand. 

Even if these power generation utilities are driven by crude oil. I doubt it will equal consumption of 17mbpd in the US. Refined fuels will begin to wane. You guys have to be seeing it. You've seen it in other industries. Personal consumer transport can already be fueled by home solar generation. As solar becomes less expensive and electric vehicles also, you'll see California (where I live) take the plunge first. Then it's off to the races. Itll take its time to hit Texas and Oklahoma I'm sure. As to how they (the .Gov entities) will afford it and even begin to think its realistic to venture away from transportation fuels of gasoline and diesel, incredibly stupid imo. however, again for another conversation as I've stated before. 

As with every other technology adoption is expensive and slow. Once the apex is reached, and we are reaching that apex in the next decade. 

You guys know by now I'm very pro oil and gas. It's my business and I'm a conservative capitalist who drives a massive F-350 and hauld a triple axle 5th wheel.  I sure hope to hell I'm wrong. I consume my fair share of it. Reality is reality though. 

[Rasmus Jorgensen + 1,169]

4 hours ago, Tom Kirkman said:

I'm open to viable suggestions to realistic global alternatives to oil and gas.  Solar and wind are negligable as far as actually 100% replacing oil & gas (and its dirty aibling coal, which is still widely used in developing countries.)

I agree that oil is not going away. But wind, solar and nuclear will all make a dent; as will increased effiencies. At some point oil demand will stagnate and then start to decline. 

[Tom Kirkman + 8,860]

30 minutes ago, Rasmus Jorgensen said:

I agree that oil is not going away. But wind, solar and nuclear will all make a dent; as will increased effiencies. At some point oil demand will stagnate and then start to decline. 

Agreed.  However, I see that timeline of stagnation and then decline many, many decades down the road.

Oil is large scale storable energy.  VLCCs of the stuff can be stored on the high seas.  Heck, Iran is storing many crude oil tankers on the oceans due to sanctions biting.

Electricity (from solar and nuclear) is not so easily stored on a large scale.

[Dmitry Bedin + 25]

4 hours ago, J.mo said:

It doesnt need to be any of that. It needs to be that electrification of vehicles becomes the dominant mode of transport in a few of the dominant world economies that consume the bulk of the world's production for fuels. 

There is not a large enough market in emerging countries to absorb and begin to build out infrastructure to adopt the technology by the time its coefficient will be building out grid and infrastructure for other electrification. 

Oil will not go away. However, demand will fall indefinitely. Leaving cashflow and lack of interest to continue to develop. Which I am sure the big boys already have their reserves procured for some time to come, but are tight lipped as they are smart and should be. But this will leave to the most efficient producer, which in itself is a sticky subject so we will leave that off the table. But demand will fall. And I'd say within 10-15 years it will be noteworthy. I sure hope I'm wrong however at this moment I am not investing in any more future locations unless they are blockbuster deals. 

To build electric car and drive it on the road you need much oil. Thats it.

[Rasmus Jorgensen + 1,169]

56 minutes ago, Tom Kirkman said:

Agreed.  However, I see that timeline of stagnation and then decline many, many decades down the road.

Oil is large scale storable energy.  VLCCs of the stuff can be stored on the high seas.  Heck, Iran is storing many crude oil tankers on the oceans due to sanctions biting.

Electricity (from solar and nuclear) is not so easily stored on a large scale.

I think that atleast stagnation is closer than most of us making a living from the oil industry want to believe. I think that oils major advantage is the established infrastructure (economies of scale). As other ways of making electricity increase (even slowly) that comparative advantage will disappear. Additionally, don't underestimate more fuel efficient ships and cars - IMO 2020 is a gamechanger. And finally, plastic waste to oil. 

All that said - I think the period of stagnation and slow decline will be a long one. 

[Tom Kirkman + 8,860]

8 minutes ago, Rasmus Jorgensen said:

All that said - I think the period of stagnation and slow decline will be a long one. 

Agreed.

[Ward Smith + 6,615]

It is a category error to compare fossil fuel with electricity. As @Tom Kirkman points out above, you can store fossil fuel, almost indefinitely. Clearly it's already Millions of years old! How does one "store" electricity? Batteries? Exactly how long is the shelf life of a battery? It's also fairly ridiculous to believe you can "store" wind and solar.

The word doldrums was a sailing term for those poor souls stuck at sea with no wind, sometimes for weeks or months. Some could have been even longer but we don't know about them because they surely died. In my state they've got lots of wind turbines, especially along a certain corridor where the wind blows, a lot. Except when it doesn't. I've downloaded the spreadsheets from the power authority and seen their "doldrums" last weeks or months. Did users stop using power for all that time, and suffer like those sailors? Not a bit, because the ultimate battery was already created. It gathered solar energy over millions of years and accumulated it in plant and fossil material, then cooked it for millions of years longer until intrepid petroleum engineers found it and recovered it. Then that chemical battery is converted to useful energy by exothermic means. On demand. 

Clearly fossil fuels are already renewable, just over a longer time scale than mere humans can comprehend. Our oceans are busy cooking up the next batch, but it's going to be awhile…

[Enthalpic + 1,496]

3 hours ago, Ward Smith said:

It is a category error to compare fossil fuel with electricity. As @Tom Kirkman points out above, you can store fossil fuel, almost indefinitely. Clearly it's already Millions of years old! How does one "store" electricity? Batteries? Exactly how long is the shelf life of a battery? It's also fairly ridiculous to believe you can "store" wind and solar.

 

There are tank/flow based batteries; they just aren't portable so are rarely mentioned. You can also use pumped hydro, you know it's technically viable.  It's just not as cheap or convenient as petrochemicals.

Oil, once out of the ground, has a shelf life.

[Tom Kirkman + 8,860]

5 minutes ago, Enthalpic said:

Oil, once out of the ground, has a shelf life.

So what is the shelf life of intermittent wind energy, once the air stops moving and the electricity generated is stored in batteries?

[Enthalpic + 1,496]

4 minutes ago, Tom Kirkman said:

So what is the shelf life of intermittent wind energy, once the air stops moving and the electricity generated is stored in batteries?

20 - 30 years, easy.  Potentially indefinitely (chemical reduction of a metal, oxidize whenever needed.).

https://en.wikipedia.org/wiki/Vanadium_redox_battery

Time durability: 20-30 years

Cycle durability: >12,000-20,000 cycles

Edited September 13, 2019 by Enthalpic

[Ward Smith + 6,615]

8 hours ago, Enthalpic said:

There are tank/flow based batteries; they just aren't portable so are rarely mentioned. You can also use pumped hydro, you know it's technically viable.  It's just not as cheap or convenient as petrochemicals.

Oil, once out of the ground, has a shelf life.

What's the acceptable loss percentage for storage? 50%, 70%, 80%?

Tank flow batteries have horrible losses, you neglect to mention that. Pumped hydro? Really? Ever added up Those losses? 

Contained oil has limited degradation, it's the volatiles in the refined products that escape to the atmosphere, ONLY if Exposed to the atmosphere. 

Edited September 14, 2019 by Ward Smith

[Enthalpic + 1,496]

11 hours ago, Ward Smith said:

What's the acceptable loss percentage for storage? 50%, 70%, 80%?

Tank flow batteries have horrible losses, you neglect to mention that. Pumped hydro? Really? Ever added up Those losses? 

Contained oil has limited degradation, it's the volatiles in the refined products that escape to the atmosphere, ONLY if Exposed to the atmosphere. 

What is the efficiency of an internal combustion engine? Hint, not so great.

I also admitted it would be more expensive and losses are factored into that cost.

Edited September 14, 2019 by Enthalpic

[Ward Smith + 6,615]

27 minutes ago, Enthalpic said:

What is the efficiency of an internal combustion engine? Hint, not so great.

I also admitted it would be more expensive and losses are factored into that cost.

There's another way to look at that "battery". A gallon of gas is 33.7 kwh of power. The Tesla has a 70 kwh battery. It's one of the best. Here are the rest. 

Frankly for the billions invested in electric cars, had that same money gone into reinventing the ICE (or perhaps moving to ECE such as a modified Stirling engine) the efficiency would be much better than today's 25-30%. But hey, fuel is too cheap so waste comes with the package. 

[Jan van Eck + 7,558]

You people keep looking at electricity generation and transport and heating use being the equivalence of oil.  That is not the only use of oil.

As oil prices drop, plastics as a durable material becomes relatively cheaper.  I predict that losses in demand for oil products as gasoline will be easily offset by surging demand for both commodity and technical engineered plastics resins, to be formed into lots and lots of very useful things.  Indeed, entire jet aircraft are already being built of engineered plastics!  That window is going to continue to expand.  Oil demand is not going to drop off some cliff any time soon.  

[Enthalpic + 1,496]

15 minutes ago, Jan van Eck said:

As oil prices drop, plastics as a durable material becomes relatively cheaper.  I predict that losses in demand for oil products as gasoline will be easily offset by surging demand for both commodity and technical engineered plastics resins, to be formed into lots and lots of very useful things.  Indeed, entire jet aircraft are already being built of engineered plastics!  That window is going to continue to expand.  Oil demand is not going to drop off some cliff any time soon.  

Perhaps, but there is growing pressure to address the plastic waste problem. Plastic bags and straws are already getting banned everywhere.  If anything I see a resurgence of paper products.

I'm pretty sure those "engineered plastics" are what most people call carbon fiber; sure plastic is involved but that's not where the strength comes from (nor the value).

Edited September 14, 2019 by Enthalpic

[BenFranklin'sSpectacles + 762]

On 9/12/2019 at 3:48 PM, Ward Smith said:

James Carville famously coined the phrase, "It's the economy, Stupid" to cut into George Bush's (the first) almost insurmountable lead. What millennials don't realize is that Bush had an 89% approval rating when James crafted that slogan, and adding in "Read my lips, no new taxes", well the rest as they say, is history. 

Today there are those claiming the economy is in the doldrums, but with markets at or near all time highs, what else would traders say? They're in the business of buying cheap and selling high, and they'll happily trash every stock to give themselves a cheap buying opportunity. Right now they're selling, holding the cash and claiming the stock they just sold is worthless so they can buy it all over again. 

Nick Cunningham penned this missive  about the lack of demand growth. I'm not convinced it's the end of the world, demand growth for petroleum has grown nominally 1% per year as far back as I can find data. IEA likewise is looking at global numbers, not US and given that current consumption is 100 million bbls per day, it seems reasonable that next year will demand another million bbls, at 1% growth. Nick's breathless article calls out a SWAG from EIA of 0.9 million bbls for a YUUUGE drop off of 100k bbls, assuming their scientific wild-assed guess remains accurate through the end of the year. 

I've got an old World Oil magazine on my desk from October 2010. Page 27 shows domestic oil production almost exactly 9 years ago today of 5,393,000 bbls total US production. Worldwide demand then appears to have been around 90 million total. 2010 the Bakken was just coming up to speed, and the Permian wasn't quite a gleam in daddy's eye yet. Today we're on track to produce 13 million and between crude and finished goods, exports are 9 million bbls per day. Therefore, by itself the US has picked up the entirety of Worldwide oil demand. 

Remember too that there are roughly 194 countries in the world, but only about 80 that have the fiscal resources to pay up for oil with petrodollars. The rest have plenty of unsatisfied demand but don't really count since they effectively can't afford oil even at these currently depressed prices. Counting the rich countries, whose populations are growing at less then 1% per year, average, we can clearly see that the majority of demand increase comes A) from wealthy countries and B) is due almost exclusively to population growth. 

There's an analogue here. A friend of mine used to be an economist for a power utility. He did all kinds of fancy math with lots of statistics, but at the end of the day the utility's demand growth quite coincidentally matched oil, at 1% per year, or roughly how much the utility's population base was increasing every year. The new CEO looked at years of this guy's reports and said, "Why are we paying this guy so much?". Like a weatherman in Hawaii, he could submit the exact same predictions year after year and generally be spot on. 

Ultimately, if you're trying to predict the price of oil, predict the population growth of wealthy countries and how much more the US is likely to keep increasing productivity. If the US keeps increasing production by more than the global demand increase, oil will fall and vice versa. 

 

On 9/12/2019 at 7:19 PM, Tom Kirkman said:

Agreed.

I have stated repeatedly ... :

The global demand for oil & gas continues to increase year after year after year, decade after decade after decade, despite what most media tell you to believe to the contrary.

Demand for *more* oil & gas is simply not going to go away any time soon.

On 9/13/2019 at 12:14 AM, J.mo said:

It doesnt need to be any of that. It needs to be that electrification of vehicles becomes the dominant mode of transport in a few of the dominant world economies that consume the bulk of the world's production for fuels. 

There is not a large enough market in emerging countries to absorb and begin to build out infrastructure to adopt the technology by the time its coefficient will be building out grid and infrastructure for other electrification. 

Oil will not go away. However, demand will fall indefinitely. Leaving cashflow and lack of interest to continue to develop. Which I am sure the big boys already have their reserves procured for some time to come, but are tight lipped as they are smart and should be. But this will leave to the most efficient producer, which in itself is a sticky subject so we will leave that off the table. But demand will fall. And I'd say within 10-15 years it will be noteworthy. I sure hope I'm wrong however at this moment I am not investing in any more future locations unless they are blockbuster deals. 

 

On 9/13/2019 at 5:41 AM, Rasmus Jorgensen said:

I think that atleast stagnation is closer than most of us making a living from the oil industry want to believe. I think that oils major advantage is the established infrastructure (economies of scale). As other ways of making electricity increase (even slowly) that comparative advantage will disappear. Additionally, don't underestimate more fuel efficient ships and cars - IMO 2020 is a gamechanger. And finally, plastic waste to oil. 

All that said - I think the period of stagnation and slow decline will be a long one. 

 

On 9/14/2019 at 12:49 PM, Jan van Eck said:

You people keep looking at electricity generation and transport and heating use being the equivalence of oil.  That is not the only use of oil.

As oil prices drop, plastics as a durable material becomes relatively cheaper.  I predict that losses in demand for oil products as gasoline will be easily offset by surging demand for both commodity and technical engineered plastics resins, to be formed into lots and lots of very useful things.  Indeed, entire jet aircraft are already being built of engineered plastics!  That window is going to continue to expand.  Oil demand is not going to drop off some cliff any time soon.  

 

On 9/14/2019 at 1:04 PM, Enthalpic said:

Perhaps, but there is growing pressure to address the plastic waste problem. Plastic bags and straws are already getting banned everywhere.  If anything I see a resurgence of paper products.

I'm pretty sure those "engineered plastics" are what most people call carbon fiber; sure plastic is involved but that's not where the strength comes from (nor the value).

 

I'm reminded of turkeys, who have every reason to believe the gravy train will continue - right up to the moment their heads are removed. 

The correlation between population and oil demand is built on a confluence of available technologies and political factors.  In the past, there were incremental technological improvements offset by incremental increases in per capita consumption.  E.g. we have more efficient vehicles, but we drive further.  Ships consume less per ton mile, but US hegemony and containerization allowed us to ship more further.  We designed more material efficient products, but we buy - and landfill - more stuff.  We produce more GDP per BTU of oil consumed, but our GDP growth is predicated on a mountain of debt.  There is a strong correlation between population and oil consumption, but the underlying causes of that correlation are both manifold and fragile. 

What happens to that correlation when:
1)  Road and rail transport completely decouple from oil consumption (electrification)
2)  Water and aviation transport partially decouple from oil consumption (electrification, NG, and H2)
3)  Plastics can be recycled with near perfect efficiency (reducing plastics to crude/syngas and reprocessing)
4)  The world shifts from ever-increasing global trade to ever-increasing local production (end of US hegemony, nationalistic policies, pursuit of greater efficiency)
5)  The debt-fueled financial orgy fueling GDP growth implodes. (The developed world can barely service its debt load, and hopes of using developing nations to continue the party are fading.)

I don't think past data will predict future oil demand because the underlying assumptions are no longer valid. 

Edited September 24, 2019 by BenFranklin'sSpectacles
Phrasing. Quoted more relevant comments.

[BenFranklin'sSpectacles + 762]

On 9/13/2019 at 4:40 AM, Tom Kirkman said:

Agreed.  However, I see that timeline of stagnation and then decline many, many decades down the road.

Oil is large scale storable energy.  VLCCs of the stuff can be stored on the high seas.  Heck, Iran is storing many crude oil tankers on the oceans due to sanctions biting.

Electricity (from solar and nuclear) is not so easily stored on a large scale.

By that reasoning, a nuclear fuel rod is also energy storage - and a much better storage medium than oil or coal!