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Monday, April 27, 2015

How Peaking Global Crude Oil Production is Being Trumped by Slowing Global Credit Creation, Resulting in an Oil Glut!

The US EIA (Energy Information Administration) tracks global production and consumption of energy...and this article utilizes their data to highlight annual production of "crude oil and lease condensate" (this is crude oil alone...not including natural gas liquids or other lower quality, lighter liquid fuels that generally are not suitable substitutes to replace crude oil's many uses).


US / Canada vs. the RoW:


The chart below shows all global producers of crude oil broken down by: a) US/Canada vs. b) global RoW ("rest of the world", all producers except the US/Canada)...plus the changes in pricing along the way.  Looking at the two distinct groups of crude oil producers generates a curious outcome...the two groups have moved in distinctly opposite directions since at least 1980. 

Why the two groups responded so differently to the same changes in price is a very good question for better minds than mine but I'll offer two potential answers...
  1. The US & Canada's older and cheaper production sources were retiring and new sources were not globally price-competitive until recently when prices reached $50+ per barrel?
  2. The structure of Nixon's Petro-Dollar agreement with Saudi Arabia, made in '73 and subsequently finalized with all of OPEC, may have discouraged domestic production.  Whether the US/Canada agreed to discourage or deny domestic crude production via means of environmental, financing, or "other means" until '08 is unclear?  What is clear is the US/Canada reacted entirely differently to pricing changes than the rest of the world.  The reason I call out '08 is that global production (x-US/Canada) peaked in '05 yet it wasn't until '08 and beyond that US production began to ramp up to bridge the gap.
SUPPLY!?!
Supply 1980-2005:

The chart below highlights the changes in global crude production from '80-'05 and the change in price per barrel.

The chart below breaks down (by source) the above chart.  As of 1980, the US / Canada represented 17% of global crude production @ 10mbpd but US/Canadian production consistently fell, both in total production and as a % of global production, to a low of 10% @ 7.6mbpd as of 2005. 

The RoW production rose +34% (+16.8mbpd) while, coincidentally, the US / Canadian production fell <-34%> (-2.4mbpd)All this based on the same rising price incentives.

Supply 2005-2013:


The chart below shows global crude oil production and the price per barrel of crude oil from '05 to '13.  A 100% price increase over nearly a decade only drew a 3% global production increase?!? 

The chart below again breaks out the above chart by producer.  What the chart clearly shows is that since 2005 global crude oil production (x-US / Canada) has fallen <-1%> on an increase in price of 100%?!?  The US / Canadian production gains since '05 (really '08) of 3.2mbpd are entirely responsible for the net increase to global production of 2.4mbpd.

By 2013 (year end), US / Canadian production had rebounded to represent 14% of global crude oil production.  However, if the RoW are unable (or unwilling?) to increase production further, subsequent US / Canadian production gains seem quite unlikely, particularly at oil prices much south of $75 barrel not to mention the present $45-$55 per barrel range.  More likely is US / Canadian production peaking in '15 and declining for some time thereafter.

The chart below highlights the month-on-month production changes, 2012 through September '14 (most recent data).  Clearly, the RoW is not making any net production gains while the US / Canada continues ramping production.


So a minute global crude oil production gain of 3% since '08 has sent the price of crude oil careening down 65%?!?  Perhaps we have a demand problem rather than oversupply?


DEMAND?!?


The first chart shows the 34 member OECD nations oil consumption since 1980...peaking in '05 and falling ever since.  This list includes: US, Canada, nearly all of the EU, Turkey, Israel, Japan, Australia, New Zealand, S. Korea, Chile, and Mexico.
And just to leave no stone unturned, the chart below shows OECD consumption continues falling (year to date) through September of 2014 (most recent data available).
The chart below shows BRICS oil consumption and the annual change in consumption...I take the BRICS as a good proxy for "developing economies" demand worldwide.  The '13 rate of consumption increase was the lowest since '09...and a declining rate of increase looks to have continued through '14 and into '15...likely below 2009 levels and potentially even outright declining.
Finally, the chart below highlights the ramp in Chinese oil consumption had everything to do with astronomical credit (and debt) creation in China!?!  China created 1/3rd of all global credit from '07 'til '14.  Likewise, China alone was responsible for nearly all net oil consumption gains from '07 'til '14.

However, China's housing boom is going bust and likely in a big way.  China's credit creation will be severely constrained absent an ongoing mortgage and housing driven bubble.

Given China's housing driven credit binge is breaking down...it's hard to guess how low Chinese oil consumption will fall.  And if China is a harbinger for the BRICS and "developing economies" in general, then slowing oil consumption among the "developing nations" eventually akin to that already seen in "advanced economies" may explain why peaking global oil production is being trumped by slowing global credit.  For without the credit aided demand, organic demand for crude oil (and nearly everything else) may be significantly lower...but trying to determine if oil prices have much further to fall is increasingly dependent on central bank actions and government credit creation...an impossible $ figure to guess. 


These are just a part of the complex economics of the depression we are entering.  Evidence of slowing global credit leading to a spreading global depression can be found in my previous report here... http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html


And of course swelling 55+ and 65+ year old populations and shrinking 25-54 year old core populations in the US and among all "advanced economy" nations are at the core of this depression... detailed here http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-4.html
and here... http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-1-advanced.html



1 comment:

  1. Interesting topic, reading and exploring about crude oil stuff is always interesting to me… even the author has explained it in such a classical manner that reading this piece was informative and yet a masterpiece to me.

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