Since 1929 is a frequent topic these days, I checked out world oil consumption from 1929 to 1939, and I found that world consumption in 1939 was up from 1929. In fact, it looks like 1930 was the only down year in this time period. One of the factors contributing to the increase in consumption was that millions of people wanted to drive cars for the first time. For example, there were three million more cars on the road in the US in 1937 than in 1929, according to Frederick Allen.
Today, hundreds of millions of people worldwide want to drive cars for the first time, while oil consumption worldwide is up about tenfold from the Thirties.
Today, there is some concern about declining demand for oil, but one point that is frequently overlooked is that the demand for exported oil worldwide has actually shown two years of accelerating declines, as declining net oil exports were auctioned off to the high bidders, with the low bidders being forced to conserve. It’s important to keep in mind that the best definition of demand is what someone is willing and able to pay. By definition, we have seen two years of forced reduction in the demand for exported oil as net oil exports worldwide fell at a rate of -1.1%/year in 2006 and -2.2%/year in 2007.
Our model, recent case histories and current data suggest that we should continue to see an accelerating long term net export decline rate. The price of oil is therefore a horse race between declining demand and declining net oil exports. While we could certainly see some short term slowdowns in the net export decline rate, I think that the long term decline rate will be relentless–and accelerating.
Unfortunately, this suggests that the really bad news for financial institutions is in the future. An interesting thought experiment. What is the intrinsic value of the world’s 100 largest financial institutions without the world’s 100 largest oil fields, and what is the intrinsic value of the world’s 100 largest oil fields, without the world’s 100 largest financial institutions?
I suspect that at a good deal of the recent short term weakness in oil prices has been due to forced selling of energy holdings, which can only continue for so long, until fundamentals reassert themselves, and I expect that an accelerating net export decline will outpace the decline in demand, resulting in higher oil prices.
