Commentary: Underestimating Demand, Overestimating Supply

(Note: Commentaries do not necessarily represent ASPO-USA’s positions; they are personal statements and observations by informed commentators.)

At the end of August each year, the IEA updates the past 15 years’ reports with all the latest revisions. I have not had time to check and see how big any revisions have been. What did strike me are the ongoing changes in both demand (which has always been viewed with a great deal of skepticism, that further growth of any magnitude was unlikely) and Non-OPEC supply which has been projected to surge beginning in the 4th quarter of the coming year for the past 15 years.

In retrospect, the best way to review key fundamentals is to look carefully at changes in global supply and demand, and where they’ve come from. Between 1991 and 2005, global demand for oil grew by 16.6 million b/d. More astonishing is that non-FSU demand grew from 58.9 million b/d in 1991 to 79.8 million barrels a day in 2005. In other words, outside the unanticipated collapse of the Former Soviet Union, the rest of the world’s oil demand grew by 20.9 million barrels a day in just 14 years (35%; 2.5% per year) vs. the projection by many oil pundits that oil demand growth was certainly slowing down.

In the meantime, non-OPEC oil supply, outside the FSU, grew in that same 14 years, but only by a modest 6.7 million b/d, from 31 to million b/d to 37.7 million b/d. That’s less than 0.5 mbd per year. Too many important regions peaked and went into decline. Had the FSU not been able to grow from 10.4 million to 11.6 million b/d and OPEC grown from 25.6 million to 34.2 million b/d, the world economy would likely have been in very hot water.

Looking forward, if FSU growth is modest and OPEC growth only happens in a handful of countries, and is offset by declines—in Indonesia, Venezuela, possibly Nigeria, Iraq, possibly Iran and perhaps Saudi Arabia—it will be impossible to tolerate any sizable jumps in demand, and certainly nothing of the magnitude that has happened over the past 14 years.

The world of oil turned out very different from what the experts at EIA, IEA, CERA, BP, EXXON and others all thought. All one needed to do to spot these major trends in the past is do a modest amount of homework, evaluating the numbers to spot key trends.

All this would be academic to the world had it not been dealing with oil, the world’s most critical and largest energy resource. How we blew the future will be the topic of many books over the next decades!

Matt Simmons is Chairman of Simmons & Co. International, an independent investment bank specializing in the energy industry.

More Supply and Demand Data (from The Peak Oil Review Editors)

Since Matt Simmons suggested looking back at trends in supply and demand, here’s a 10-year retrospective on the largest gainers and losers on the oil supply side. We also attached the domestic oil consumption trends for those same countries.

What the data tells us:

• The total supply gain in Russia and China was offset by the increased domestic consumption in those two countries. In essence, Russia’s gain was swallowed up by China. Note that Russia’s internal consumption is gaining ground faster than the 10-year figure would indicate.

• The 10 nations with the most declines doubled the impact of those declines by increasing their domestic consumption at an amount equal to their decline.

• One of the gainers, Iraq, is a very questionable bet to repeat its gain, which reflected Iraq’s transition from embargoed exporter in 1995 to war-torn exporter today.

• Two of top 10 decliners during the last decade—Columbia and Australia—dropped an additional ½-million barrels per day after their peaks (in 1999 and 2001, respectively). Thus the relatively modest sum of this 1995 to 2005 comparison belies their true depletion stories.

• We note that during the coming decade, at least three of the Big Gainers from the last decade—Russia, Mexico and China—are projected by many analysts (including their own internal agencies) to hit peak oil and go into decline. Owing to political strife, Iraq and Nigeria are wild cards. Are the five remaining players—Saudi Arabia, Kazakhstan, Canada, Brazil and Qatar—up to the task of generating major increases during the decade to come?

Biggest oil production gainers vs. losers 1995 – 2005
plus the increased domestic consumption factor

Source: BP Statistical Review of World Energy, June 2006