Why the Price of Oil Went Up

Why the Price of Oil Went Up

Alister Hamilton (Electric Ali)

Oil Export Terminal, Saudi Arabia (Image: 2B1stConsulting.com)
Oil Export Terminal, Saudi Arabia (Image: 2B1stConsulting.com)

While OPEC is the Organisation of Petroleum Exporting Countries, not all oil exporting countries are members of OPEC. As we have seen in my first post, UK Fossil Fuel Production: A Brief History, the UK was an exporter of oil between 1980 and 2005 when output from the North Sea was in full flow, but has since returned to its more accustomed role of oil importer, importing approximately half a million barrels of oil per day in 2011, according to BP data.

In 2005, there were 33 net oil exporting countries in the world. That number has declined since as Argentina, Malaysia and Vietnam have left the unofficial club of net oil exporters. More countries will follow. Using data mostly from the BP Statistical Review of World Energy 2012 together with a small amount of data from the US Energy Information Administration, we can build up a picture of oil production from the 33 net oil exporting countries.

Net Oil Exporters (2005): Production (Image: A. Hamilton)
Figure 1: Net Oil Exporters (2005): Production (Image: A. Hamilton)

As we can see from the figure, oil production from these countries has increased only very slightly in the six years from 2005 to 2011, by just over 1 million barrels per day. This is by far the lowest rate of growth in oil production from these countries in any six year period since the oil shocks of the 1970’s and represents an effective six year production plateau.

When we look at oil consumption in these countries, we see a somewhat different picture. Oil consumption in the 33 net oil exporting countries has increased over the decade to 2011 at an average rate of 2.9% per year. Oil consumption has grown by 2.91 million barrels per day in the period 2005 through to 2011.

Net Oil Exporters (2005): Consumption (Image: A. Hamilton)
Figure 2: Net Oil Exporters (2005): Consumption (Image: A. Hamilton)

By taking oil consumption away from oil production for the 33 net oil exporting countries, we get a picture of the net oil exports available for the rest of the world to import – countries like the UK. What we see is that, although production increased by 6.8 million barrels a day between 2002 and 2004, exports only increased by 5.7 million barrels per day due to rising internal consumption in oil exporting countries. And the maximum amount of oil exported by oil exporting countries was 45.87 million barrels per day in 2005. Since 2005, net exports have declined by 1.89 million barrels per day as oil production in the 33 net oil exporting countries has been approximately flat, while internal consumption has increased. This decline in available exports since 2005 has pushed up the price of oil on the market.

Net Oil Exporters (2005): Net Exports (Image: A. Hamilton)
Figure 3: Net Oil Exporters (2005): Net Exports (Image: A. Hamilton)

Now let’s factor in the massive increase in oil imports in rapidly growing India and China. If we treat India and China as one country, we can take their combined oil consumption away from their combined oil production to get a picture of their combined net oil imports as shown in the figure. The slightly alarming thing about oil imports by China and India is the rate of increase, an average of 10.1% per year between 2002 and 2011.

Now let’s try playing around with the numbers.

Let’s assume that oil production by the top 33 net oil exporters remains constant at just over 63 million barrels per day. Let’s also assume that the internal rate of oil consumption increase within the top 33 net oil exporters remains at 2.9% per annum. And finally, let’s assume that the rate of increase in oil imports by China and India combined continues at 10.1%. That is, things continue as they have been for the last few years.

If things keep going the way they have done recently, by 2026 – just 13 years away – the amount of oil on the market would be enough to supply China and India alone. There would not be enough oil for anyone else. None for the USA. None for the EU. None for the UK. Scary stuff.

India and China Net Oil Imports (Image: A. Hamilton)
Figure 4: India and China Net Oil Imports (Image: A. Hamilton)

But things won’t work out quite like that. They’ll probably be much worse! I’ll go into the reasons for that in my next post. But for now, let’s take a look at what might be called “Available” Net Exports defined here as the net exports from the 33 net oil exporting countries in 2005 minus the oil imports of China and India, i.e. the oil exports “available” to everyone else.

Net Oil Exporters (2005): Available Net Exports (Image: A. Hamilton)
Figure 5: Net Oil Exporters (2005): Available Net Exports (Image: A. Hamilton)

An even clearer picture now emerges. The pool of oil on the market “available” to countries other than India and China to import reached its maximum extent at 40.74 million barrels per day in 2005. That pool of oil has declined in size ever since due to a plateau in oil production in oil exporting countries, increasing internal consumption in oil exporting countries and dramatically increasing demand from the emerging economies of India and China, home to around 2.5 billion souls. The decline since 2005 is 12.38%.

Due to the basic economics of supply and demand, the price of oil on the market should have started rising around 2005 as net exports and “available” net exports peaked. And if we take a look at the price of Brent crude oil, here plotted as the average oil price over each year, that is exactly what we see:

Brent Oil Price, US$ per barrel, annualised (Image: A. Hamilton)
Figure 6: Brent Oil Price, US$ per barrel, annualised (Image: A. Hamilton)

Others have noticed and reported on these trends before and I am particularly appreciative of the work of Jeffery Brown and Kjell Aleklett of the Association for the Study of Peak Oil (ASPO). The term “Available” Net Exports is taken from the work of Jeffrey Brown, who has kindly supported my work via personal communication.

All graphs produced by the author using BP and US EIA data.