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Monday, June 20, 2016

Peak Oil Consumption Dead Ahead (But Price is Anybody's Guess)

I have no idea nor will I take any guess as to the price of oil going forward.  There are too many variables to make an educated guess.  If you want a bullish or bearish POV on price...this isn't likely the article for you.  All I do know is the world is likely very near peak oil demand.  Details and evidence follow...

The combined 34 OECD nations (list HERE) plus China, Russia, and Brazil represent 70% of global oil consumption while they represent about 40% of global population (chart below).  In comparison, Africa and India (combined) make up 8% of oil consumption despite being 33% of global population and certainly beyond 2/3rds of all present net population growth.

The chart below shows the EIA (Energy Information Administration) historic and estimated global oil consumption by OECD vs. China+Russia+Brazil vs. India+Africa vs. RoW. 


From 2015 to 2040, the EIA anticipates global oil consumption to increase by over 27 million barrels a day.  Of that, the OECD to represent 2% of the growth, China+Russia+Brazil 25%, India+Africa 27%, and the RoW 46%.

To begin, I'll focus on the present consumers of 70% of the worlds crude, the OECD+China+Russia+Brazil.  And if we check the annual change to their combined 0-64yr/old population (blue line in the chart below), 0-64yr/old population growth has decelerated 90% since the '88 peak and cumulatively turns to outright annual declines by 2019.  The annual declines accelerate indefinitely from there.  I also show total 0-64yr/old annual global growth (black columns) and 0-64 growth among the RoW or Rest of the World (red line).
OECD
As for the OECD, the chart below shows 15-64yr/old annual population growth peaked in '82 and has decelerated since.  However, the deceleration went off a cliff in 2012 and continues slowing further until it goes into full decline as of the middle of next decade.  However, OECD total oil consumption rose from 1981 until 2005 when it began a sharp contraction.  Since 2005 on a 75% fall in annual adult population growth, total OECD oil consumption has fallen 10%.  Over the next 25yrs, EIA estimates oil consumption to be flat against the outright adult population declines upcoming.  EIA estimates of flat-lining consumption are highly unlikely against the core population declines to come.  Further OECD oil consumption declines are almost a sure thing.
And if you're curious how this correlates to Federal Funds Rate and global debt accumulation...yup, FFR's peaked in '81 just as the growth rate began decelerating and hit ZIRP just ahead of the demographic waterfall.  Obviously, since 1981, the fall in FFR and rise in debt and oil consumption have all been very closely linked.

China, Russia, Brazil
Below, China+Russia+Brazil annual 15-64yr/old population change.  Adult population growth has ceased among these nations and will continue falling for decades.


From this point forward, the EIA estimates that a declining combined total number of adults in China, Russia, & Brazil will increase their oil consumption over the next 25yrs by nearly 8mbd.  How a shrinking population of adults (let alone shrinking under 65 population) would increase their consumption by nearly 50% over the next 2.5 decades while technology and environmental pressures continue to make oil usage more efficient...is a true mystery.



The chart below looks solely at China annual adult population change (blue columns), total Chinese debt (red line), and Chinese oil consumption (black line).  Noteworthy since 2003, a 100%+ decline in Chinese adult population growth vs. the 1000% increase in total debt...all to achieve a doubling of oil consumption.  The EIA apparently sees no red flags here & EIA estimates for China, Brazil, Russia oil consumption are pure fantasy.  Outright consumption declines are far more likely.
Again, the population responsible for 70% of global oil consumption begins outright shrinking next year and continues thereafter indefinitely.  Combine this with technological advancements, environmental restrictions, and gaining market share among electric vehicles (etc. etc.) and the demand side of the equation is set to slow indefinitely regardless IEA claims to the contrary.



India & Africa
What about substituting the growing populations of India or Africa for the shrinking wealthier nations?  The chart below shows the growth in oil consumption since 1980 among China, India, and Africa.

The EIA expects a combined India / Africa to double their oil consumption by 2040 & provide 27% of global growth in demand.  My problem with this forecast isn't a lack of population growth in India or Africa...as nearly 80% of the global growth will come from these two sources.

My problem is China's ramping oil consumption has not been emulated by either India nor Africa in the good times.  Now, neither are likely to achieve similar export driven growth in a world awash in overcapacity.  Absent healthy importers, there can't be healthy exporters.

Below, Indian 15-64yr/old population growth (blue columns) peaked in 2005 and continues decelerating from here (already down 20% from annual peak growth).  Debt to GDP (red line) will likely rise significantly simply to maintain any growth in oil consumption (black line) against the decelerating population growth.

Below, Nigeria is representative for many African nations experiencing rapid core population growth (blue columns) despite seeing little to no gains in oil consumption (black line).
RoW (Rest of World)
As for the remaining 23% of the worlds population, the IEA has targeted a 60% increase by 2040 over their current oil consumption.  This is 46% of the total estimated global oil consumption growth.   Their population growth is decelerating but their incomes, savings, and access to credit higher than India/Africa.  I'll again take the under on the IEA estimates as absent a healthy world, economic activity is slowing but this is a more disparate grouping and more difficult to make any sweeping statements regarding these estimates.

Conclusion
I make my argument why global oil consumption is likely soon to peak...and why EIA estimates are likely entire bunk.  But this isn't just true for oil consumption but true for most commodity consumption & general consumption world over. 

Not discussed is the price side of oil as I have no good way to gauge price impacts because demand is only one variable...the other variables of interest rates (potential NIRP), currency impacts, potential supply disruptions, new technology, etc. etc. are simply unknowable.

And of course, there is a real potential that as demand for oil and most things decelerates that a real unwind takes place with far greater impacts than slight reductions in oil consumption.

5 comments:

  1. Excellent juxtaposition of demographic change with economic and energy demand change. Very few analysts are bright enough to see the connection.

    Anonymouse

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    Replies
    1. Thanks but funny I'm no brain surgeon or super analyst. Seems the smart guys are paid very well precisely not to mention the most obvious of connections. Upton Sinclair seems to have had it right.

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    2. Upton Sinclair? where?

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  2. This is really great analysis Chris, thank you. Re: Sinclair, it's no wonder you don't have a job : ) If it's any consolation, I've read all your recent demographic work at least twice. It's very powerful work IMHO.

    d

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  3. Great work, thank you. Your recent posts have hammered home to me the point that most of the population growth in developed countries is coming from people getting older, not more people being born.

    Linking that to consumption levels is a great idea - and I haven't read anyone else doing it. However, I am wondering whether your focus on 15-64 year-olds as the sole engine of consumption is misplaced. Isn't it possible that wealthy 65+ year-olds will have high consumption too? Being 65 in the 2010s is not like being 65 in the 1980s (there are geographic differences too obviously).

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