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The next oil price shock -- an update

Having done some analysis, I've decided to postpone my projection for the next oil price shock. I have moved the date from 2012 ± 1 year to 2013 ± 1 year. I've updated the graph below to reflect the timing of the next blow-up in oil prices. The change reflects my view that there will not be a price spike in 2011.


This is not a "price" graph—nobody can predict future oil prices. It's simply a schematic showing that—

  • demand surges cause oil price shocks (the peaks)
  • oil price shocks cause recessions and force reductions in demand (the troughs)
  • the average price of oil goes up over time (the ascending blue line)

Informally, we can say there's been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months.

There is little doubt that burgeoning oil demand in China will drive the next price shock. I expect total oil demand in the OECD—the developed world, including the U.S, the Eurozone, Japan, Korea, etc.—to remain flat (or even decline) over the next few years. A host of factors make a vigorous economic recovery in the OECD countries impossible to achieve. Therefore, there is little reason to expect a significant rebound in OECD oil consumption.

Of the so-called BRIC countries—Brazil, Russia, India, China—only China has the economic clout to drive another oil price shock. Brazil will easily cover its future needs and is not a significant exporter. Russia's internal oil demand growth is small, and will not affect their export levels anytime soon. Growth in India's oil imports will be modest relative to world demand. So we need to examine the current trend in China's oil demand growth. The first graph shows China's oil imports since 2000, and the second graph shows the more recent trend in China's oil imports.

The data is through April, 2010. The apparent strong price connection between China's oil imports and the oil price has not held up over the last 5 months. The oil price today is $76.88/barrel, which is about the midpoint of its current range $67-$85. (See the next graph).

China's oil demand, in metric tons. Source: Rigzone based on data from Platts. 35 million metric tons = 8.24 million barrels per day.

You can see in the 2nd graph that there is a great deal of volatility in China's oil imports month-over-month. However, the current trend could be labeled "flat" in the range shown. Still, the growth numbers through August, 2010 are frightening

September 10, 2010 -- China’s crude oil import volume grew 22.6 percent year-on-year to 158 million tons in the first eight months of 2010, reports, citing data from the General Administration of Customs (GAC).

The total value of crude oil imports grew 77.6 percent year-on-year to $88.31 billion in the first eight months.

The volume of refined oil imports dropped 8.5 percent year-on-year to 23.88 million tons, while the value of refined oil imports was up 30.1 percent year-on-year to $14.08 billion in the first eight months of 2010.

[My note: Using the standard conversion, 1 metric ton = 7.3 barrels of oil. China's average daily crude oil imports were approximately 4.75 million barrels per day through August.]

If China's oil imports were to grow next year at the same rate they did this year, the Chinese will be importing an additional one million barrels per day in 2011. That's a lot of crude oil, but not enough to create an oil price shock. In so far as I expect oil demand in the rest of the world (excluding China) to increase by (at most) two to four hundred thousand barrels per day in both in 2011 and 2012, I have postponed the date of the next oil price spike.

On the other hand, if this forecast is correct, it will be impossible to avoid an oil price shock before 2014—

The latest China Oil & Gas Report from forecasts that the country will account for 36.78% of Asia Pacific regional oil demand by 2014, while providing 44.91% of supply.

Regional oil use of 21.42mn b/d in 2001 is set to reach a forecast 27.15mn b/d in 2010, then to rise to around 30.21mn b/d by 2014.

Regional oil production was around 8.35mn b/d in 2001 and is forecast to average an estimated 8.82mn b/d in 2010. It is set to increase only slightly to 8.89mn b/d by 2014. Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion.

In 2001 the region was importing an average 13.07mn b/d. This total will rise to a projected 18.32mn b/d in 2010 and is forecast to reach 21.32mn b/d by 2014. The principal importers will be China, Japan, India and South Korea. By 2014 the only net exporter will be Malaysia.

The real question regarding China is this: can they keep this crazy economic growth going? What will happen when their massive property bubbles collapse? The rumor on the street is that the Chinese are building new cities nobody lives in. China's future oil consumption may be overstated. I will have to explore this subject in another post.

What do you think? Leave a comment below.

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