Oil demand will soon outpace oil supply, warned Matthew Simmons in a July 1 talk to the American Association of Professional Landmen, an oil and gas trade group. Simmons, an outspoken voice warning of looming energy challenges, is also chairman of Simmons & Co., an energy-focused investment bank in Houston. “Demand has become a runaway train,” he warned, echoing a message in his recently published book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
It’s a provocative theory, but it’s unclear much influence, if any, such comments have in the wider world. But Simmons’ point about demand shouldn’t be dismissed too quickly, or so the latest news from China suggests, which surprised analysts with a stronger-than-expected expansion in its economy. “China’s huge economy grew by a blazing 9.5 percent in the first half of 2005 from the same period a year earlier, surging ahead despite efforts to ease breakneck growth, the government said Wednesday,” the Associated Press reports today via The Washington Post.
Economic growth, of course, is the engine pushing oil demand higher, as recent economic history suggests. Global demand for petroleum rose by 3.4% last year over 2003, reports the Energy Information Administration. That translated into an increase of demand amounting to an extra 2.7 million barrels a day, bringing last year’s average demand to 82.8 million barrels a day worldwide.
The question is how much more oil will the global economy require? That depends on how fast the global economy expands. Taking a stab at an answer, or at least a guess, the Energy Department projects that world petroleum demand will ascend at a slower pace in 2005 vs. 2004, advancing just 0.9% this year. Then in 2006, demand growth will perk up a bit, the Energy Department predicts, rising by 1.6%. Assuming those projections prove accurate, oil suppliers will have to come up with additional seven million barrels a day to feed the global economy’s habit. How much is seven million barrels? That’s about one-fifth of Opec’s total output last year.
If there’s a respite in the demand growth it’s likely to come from less-than-stellar economic growth. In fact, the high oil prices of late have slowed demand globally, advises a new report from the American Petroleum Institute via MarketWatch.com. A similar downward revision in projected global oil demand was noted last week by the International Energy Agency.
But how long will demand growth take a holiday? Not long, IEA suggests, explaining that the current slowdown in demand growth is partly due to a slightly less-thirsty China. But that won’t last, the group says, predicting that Chinese demand will “rebound” in 2006. Indeed, the Middle Kingdom’s strong economic growth in this year’s first half suggests no less.
Assuming markets weigh the future and process that by spitting out a price, the question then becomes: when will futures traders factor in anticipated growth in the here and now, and by how much?