Pumped up about oil prices
Beyond Middle East tensions, emerging market consumption, oil production will keep prices rising.
Moffatt & Nichol
Segments of the freight movement industry that have yet to adapt their practices to higher energy prices should consider following those that have, since oil industry trends show prices are likely to rise further even when tensions in the Middle East abate.
Since the trough two years ago at $34 per barrel of oil, fuel prices have steadily climbed, driven by faster and steadier growth in demand in emerging market countries compared to mature industrialized nations where factors such as aging populations and manufacturing offshoring trends are slowing consumption.
Properly analyzing the oil market requires much data on types of oil reserves, oil inventories (commercial and strategic), oil production capacity as well as production and exploration costs, oil consumption by primary use and by region. National and international agencies and companies that participate in the oil industry make such data available. However, data aggregated at the global level, as shown in the chart here, and a few observations should justify concerns about oil industry trends.
The developed economies label in the chart refers to the United States, Canada, western Europe and Japan, while the rest of the world’s countries are labeled as emerging markets. The oil consumption data shows 2008 was the first year when emerging market economies consumed more oil than developed economies. The global recession of 2008-2009, which affected developed economies more than emerging markets, may have brought that date forward, but the long-term trends shown in the chart indicate this was likely to occur by 2010.
Given other macroeconomic trends it is not surprising to see emerging market oil consumption overtake that of developed economies. Emerging markets have a much larger population. The oil intensity of developed economies (measured as the amount of oil needed to produce $1 of gross domestic product) has declined as manufacturing has been offshored to emerging market economies where oil intensity has been increasing. This is accelerating income growth in emerging markets and consumers there have begun spending more on higher priced items such as automobiles.
In 2009 China automobile sales surpassed the United States. In 2010 Brazil displaced Germany as the world’s fourth-largest auto market. North America and Europe sales growth looks to slow as populations age and vehicle miles traveled decline.
Overall consumption is likely to continue increasing, particularly as emerging market economies continue to recover. When the final estimates are published, global oil consumption in 2010 is likely to set a new record of about 87.1 million barrels per day, according to the International Energy Agency.
Meanwhile, oil production, which declined in 2009, may have regained in 2010 the 86.8 million-barrels-per-day level of 2008. Oil production has lagged in response to the inventory buildup that resulted from declining demand in developed economies during the long recession.
There is substantial debate about oil production capacity growth and the level of proven oil reserves around the world. According to data from British Petroleum there are 1.3 trillion barrels of oil reserves in the world, about 42 years of supply based on current levels of consumption.
However, the newer additions to the stock of reserves are in increasingly difficult places to reach, such as offshore locations that are miles below sea level, and some reserves in forms such as shale, that are expensive to refine. As demand grows, what matters is the marginal cost of a barrel of oil. Oil prices will have to rise further for much of these reserves to be tapped. In short, oil prices are likely to trend higher.
It is no surprise to see ocean carriers order larger ships and engage in slow steaming in order to offset the impact of higher fuel costs. It is likely that the pattern of offshoring of manufacturing will also be impacted because locations closer to the United States should become more attractive. Importers are also likely to revise their distribution strategies. Segments of the freight movement industry that have not yet made plans to adapt to higher fuel prices should consider doing so soon.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454, or e-mail, email@example.com.