Projected long term oil demand falls by 10 million barrels in just one year

petrol_consumption22Why am i talking about oil demand projection?

Because demand projection influence price, and price of oil influence the price of almost every other goods and service.

Hovering around USD 55 (as of Nov 20 2008) the price of oil may look really low, but a bit of look of history shows that this is the same level of oil price in early 2007, and it took less than 18 months for oil price to reach its peak level.

Is it possible that we will see the same craziness of oil price movement? Quite possible

How?

By having demand projection that runs wild and allowing speculators to ride on the demand projection.

Real consumers of oil use demand projection to determine the price their willing to hedge their oil supply, and Speculators of oil also use demand projection to further pony up the price. I argue on a previous post that the price increase in mid 2008 has been driven mostly by speculators. Who justify their price by waving the demand projection for 2020 and beyond. If we want to keep oil price at sane level, for both producer and consumer, we need to scrutinize the demand projection. That’s why we have this post.

In mid November 2008, the International Energy Agency revised their oil demand projection for 2030, from 116 million barrels/day (last year’s projection) to 106 million barrels/day (latest projection). FYI, the current demand stands at 85 million barrels/day. (news on this topic can be found here)

Now, changing your projection by 10 millions barrels out of 116 means a lot. In a market where a perceive demand gap of 1% could sent prices to the moon, changing your projection by 9% is certainly significant. What if in November 2007, instead of publishing the 116 MMBPD (million barrels per day), IEA publish the 106 MMBPD projection? Would this have an impact on price on mid 2008? Can you really say “no, the 9% lower demand would have no impact on price”?

A fickle long term projection

IEA could argue that the ” base scenario for energy demand has slowed due to the global economic slowdown and higher oil prices”

But there are several issues with that argument.

1. A long term projection is that, a long term projection.

A long term projection should be based on not-so-fickle factors. Factors such as population level and growth, estimated economic level at a certain point in time, benchmarking demand with other countries which had achieved such economic level. You know, huge factors, and since the factors are huge, they to be quite stable.

If you stray from your projection by 9%, that means one of these huge factors have strayed by 9%. Either the world population is reduced by 9% (that’s a lot), or the global economic level at the projected time is reduced by 9% (also a lot), or the people of emerging countries consumes less even when they are as wealthy as those in developed countries (unlikely – its human tendency to keep up with the joneses), or the ratio of oil consumption per GDP output has been reduce by 9% (even oil executive says such thing is unlikely, that oil will be the staple fuel for economic output) or a combination of these factors (still a lot).

A long term projection is like a cardboard house, while short term and medium term projection is like a house of cards. Both are not rock solid, but a cardboard house should not be blown away easily by wind.

Long term projection would certainly be inaccurate, it will be a bit of a crystal ball, and you have to forgo the possibility of catastrophes that will influence demand. But here, the IEA is talking not only about a long term projection, but a global one at that. It will take a global catastrophe to bring the global oil demand projection down. Which brings us to number 2.

2. The 2008 economic depression is not a catastrophe, it’s a predictable event; wielding such great influence, the IEA has no reason to miss the possibility of 2008 economic depression.

There are proffesionals who predicted the mortgage collapse, hedge funds, Goldman Sachs, there’s is also  a mounting evidence of an imminent US bubble burst (if one is willing to have open eyes).

Yet when publishing the demand projection in 2007, IEA didn’t see a possibility of a failure in US economy, while bad news about mortages been circulating since earlier that year. Indeed, closer to that date, several major names in Financial Services has already reported losses, losses, on mortgage related assets. Such failure would have an impact on China and India, thus would have an impact on their short-medium term demand projection (not long term, if you’re long term projection is that fickle, one wonders what assumptions did you use or how did you build your projection).

The 2008 event is not a catastrophe, there has been many datas and news that points to a possible collapse of the mortgage market, and off course and ensuing chaos in the instituion that holds the mortgage related assets. The only for one to not see the possibility, is by basking oneself to the opinion of market hopefuls and refusing to see the implication of so many bad news.

If IEA’s projection for 2030 cannot account for something that can be seen by other proffesionals, how reliable can their supposedly long term projection be? Yet IEA promote their projection without shame, even today, promoting the influence of that projection on price and the oil consumer accept the projections as data.

3. Citing “high oil price” as a basis for the demand projection is just false, price is already low. IEA says “price has gone up, thus demand will go down”, but by early August 2008, oil price has fallen. Yes there’s is a global economic slump, but oil price is not high, it is low. How can IEA still cite and use “high oil prices” as a basis for the demand projection published in november 2008? This is the guys who are supposed to be proffesionals, yet they insist on using outdated data as a basis for their projection, and they publish this projection, in which the publication will be used by the public to make pricing decision. Scary isn’t it?

Maybe in six years, we forgot what is data and what is not. But the discerning readers, don’t forget

This post is not only about IEA, many other “authorities” in energy also publish their long term projection. But like IEA’s, their projection can be shoddily build and subject to momentary hickups and market fads. The discerning readers should learn from what we see in oil price in 2008, how members of global oil market screw each other to drive price higher and higher, only to find it fall after the fundamentals is uncovered. Then when history repeat itself, as it always does, the discerning readers will bid his time, hold his money, and make his killing.

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