Thean: <<On the worldwide basis US consumption is declining as a percentage of total world consumption but still commands a formidable impact. Shall we be tracking the economic outputs of the emerging countries in particular those in Asia Pacific? Having suggested this, I do understand that having high demand of gasoline in the US will not hurt the driller's stock price.>>
You raise excellent points, IMO. The U.S. still has a significant impact on worldwide crude demand in two particular areas: (1) gasoline demand during the summer driving season, and (2) heating oil demand during the winter. These factors are particularly important since a typical refinery "crack" of a hydrocarbon molecule produces more motor gasoline than distillates and residuals. So far, worldwide distillate demand is rising more rapidly than worldwide gasoline demand (5%+/- versus 2%+/-). However, the U.S. consumes a hell of a lot of gasoline in general, and gasoline demand typically correlates tightly with GDP growth, which was a whopping 5.6% in 1Q97 before adjustments (which may revise the preliminary figure upwards). For this reason, the summer gasoline season is going to be a leading indicator for winter heating oil stocks, and hence will set the tone for winter oil prices. Weather obviously will have a major impact as well, but its occurrance is more random and less predictable.
Having said that, SE Asia is the big "sink" right now for worldwide energy demand. China, in particular, holds the key for long term oil prices, IMHO. Let me offer up a little anecdote to help illustrate this point. When I was in Singapore back in 1992/93, I was preparing a pie chart on overall SE Asian energy demand when I first learned that China alone made up a whopping 85+% of regional demand, even then! (Imagine what it must be now!) Now couple that with three other factors: (a) a very rapidly growing economy by all international standards, (b) relatively low, but rising, per capita energy demand, and (c) an enormous population base.
For example, China has grown at a rate of 7-15%/year for the last 5 years, and it is expected to overtake Japan as the world's 2nd largest economy in just a few years time. Furthermore, few people in China currently drive cars relative to the rest of the industrialized world, but the gap is closely rapidly. Finally, China holds 1/4th the world's entire population within a single national boundary!
What does all of this mean in terms of overall worldwide energy demand??? IMO, it means that there is a fundamental shift occurring, from the industrialized countries of the so-called "first world" (the U.S., Western Europe, and Japan), and to the developing countries of the "third world": e.g., SE Asia (China in particular) and Latin America (which is also growing quite rapidly, but does not yet move the markets as significantly as SE Asia).
This ongoing shift is the main reason that I am so bullish about the fundamental outlook for the oil industry. Of course, one must also look at supply growth as well. To be perfectly honest, though, I have a hard time envisioning any likely scenarios that would allow supply-side growth to overcome current and future demand-side growth, especially given that supply growth must overcome the natural depletion rate that is inherent in crude oil production (typically 1% +/- per year). In other words, supply growth from new sources must be at least 1% more than overall demand growth just to stay even, simply because supplies are naturally dwindling by at least 1% every year as producing fields age and production profiles start to ramp down.
Then when you take into account the low inventory levels throughout the world brought about by the recent shift towards "just in time" inventory management, you end up viewing the worldwide supply/demand balance like it's sitting on a knife's edge which is easily susceptible to supply-side disruptions, usually political in nature, which tend to raise prices. (Daniel Yergin's Pulitzer-prize winning book, "The Prize - The Epic Quest for Oil, Money, and Power", provides a fascinating, historical chronology for those interested in learning more on this subject.)
IMO, the greatest uncertainties surrounding this long-term outlook have to do with technology. There are obviously political uncertainties as well, but for the most part, political uncertainties have greater upside impact on oil prices than downside, notwithstanding the ongoing political tar-baby known as Iraq.
The first big technological uncertainty, IMO, is called "gas-to-liquids" conversion, a little-known but potentially revolutionary process developed by Exxon that purportedly allows economic conversion of natural gas to liquid fuels in a $20/bbl+ price environment. The main threat of this process is that it could add significant additional supplies to the overall liquids market from natural gas fields, many of which are huge, but cannot currently be developed economically due to the natural limitations of transporting gases relative to liquids. (Gas fields usually need to be located relatively close to consumer demand before they can be developed since the typical transportation linkage involves expensive pipelines and compressors. In other words, you can't simply pull up a truck or a tanker and say "fill 'er up"!, like you can with oil. (The biggest exception to this rule is obviously Liquified Natural Gas, which is transportable by LNG tanker, but is very expensive to bring to market. Hence LNG develpments often turn out to be uneconomic.) Therefore, gas-to-liquids technology could realistically place a overall cap on potential crude prices, IMO, if it ever gets rolled out commercially on a large scale.
The second big technological uncertainty, believe it or not, has to do with the Internet! There is a school of thought making the rounds throughout the industry that questions whether the enormous growth of the Internet will actually begin to curtail fuel demand in highly industrialized countries (i.e., the United States, and to a lesser extent, Western Europe and Japan) through the process of economic substitution. This theory was developed, to the best of my understanding, by a group of consultants at Cambridge Energy Research Associates (CERA). It suggests that the increasing use of the Internet by individual consumers for information gathering, communication, entertainment, and commerce may eventually start to cut into normal travel demand from primary transportion means (i.e., cars and airplanes). Some people in the industry think this is complete b______t! I personally think it is conceptually possible, but must still be proven over time. For those doubters among you, please ask yourself a simple question: Have I (or anyone that I know) ever opted to avoid a physical trip, whether by car or plane, due to the availability of an alternative choice made possible by on-line communications via the Internet. By alternative choice, I mean things like: e-mail communications between friends, relatives, & business colleagues; and commercial ordering of consumer products or consumables like groceries, flowers, clothing, or electronics goods. If you answered yes to this question, then you've proven to yourself the conceptual basis for CERA's substitution theory. The only thing that remains to be seen, IMO, is the actual magnitude of the ultimate impact. In other words, will substitution have a material effect on demand growth, or will it simply get lost amidst the increasing demand growth of China, Latin America, and other developing economies?
Obviously, the "gas-to-liquids" technology will take a little while to develop and prove commercially, but the summer gasoline season could actually shed some insight into the substitution issue in the near term. Generally, most forecasts are predicting U.S. gasoline demand to be quite robust this year (2%+), so if these predictions do not pan out, in light of the enormous GDP growth that the U.S. is currently experiencing, the depressed demand might be an indication of the validity of CERA's theory.
IMO, the above issues are the two biggest uncertainties that could have the greatest impact on the long-term oil supply/demand balance worldwide, hence I am keeping a watchful eye on their potential threat over the long-term horizon. Nevertheless, the short-to-medium term trends are already locked in place, and those trends are quite bullish. Not too surprisingly, I am very bullish about the short-to-medium term financial prospects of the oil & gas industry. |
