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.

Home Forums Why the Price of Oil Went Up

This topic contains 4 replies, has 4 voices, and was last updated by  PerLyngemark 4 years, 8 months ago.

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  • #1929

    Trevor Larkum
    Keymaster

    Why the Price of Oil Went Up Alister Hamilton (Electric Ali) While OPEC is the Organisation of Petroleum Exporting Countries, not all oil exporting co
    [See the full post at: Why the Price of Oil Went Up]

    #1941

    PerLyngemark
    Participant

    Thanks for the great article, makes one even more determined to cut the dependence on oil sooner than later.

    However I downloaded the BP raw data and looked on the numbers… I think to predict that China and India will continue to increase their oil usage by 10% the coming 10years is a big stretch.

    I currently live in China and I can see that the government are trying to improve things here, but it’s very futile, people are getting richer faster than the government can make laws preventing people buying cars.

    The incentive to buy an EV in Shanghai (where I live) is now up to 160,000rmb (about 16,000Euro). The EV incentive is 90k RMB and the EV doesn’t need to buy a license plate (these are auctioned every month, with last month the cheapest going for 70k RMB). Shanghai are supposedly building 25,000 recharging stations, but I have yet to see any.

    However none of the car makers here have any EVs in store, and asking for one they all say there is no demand. An EV would be an ideal car in China, since most people travel within the city only, with very rare trips outside. Trains are very cheap here, so most long distance trips would be by train. For instance no one in their right mind would drive from Shanghai to Beijing, the roads are not very good and the trip would be prohibitively expensive with all the tolls. While a high speed train would take you there in 5hrs for 55Euro.

    The government needs to educate the people about EVs to make them popular, most people assume EVs are using LeadAcid batteries and range is 40km or so… Also since most people live in apartments there needs to be a charging network and massive rebates to install wallchargers at home/work/shopping malls.

    #1942

    MITSCH
    Participant

    I would also praise the article for the common sense that it brings. It’s nothing new, that the price of oil will come up, but it’s like healthy food- we all know what’s good for us, but tend to ”forget” it, when we’re hungry.

    PerLyngemark could you tell me the prices of fuel on the fuel stations in China?

    Mind you though, Europe has a hefty buffer zone when it comes to fuel. As the prices of oil come up, the taxes and tariffs will have to come down. Especially when the EV alternative comes. We will see european countries gasping for financial air and probably dismantle the social state even more.

    So in the short time, as the oil prices come up, American consumers and producers will have to react first, since they have no buffer zone in prices. They already have the upper hand (probably they buy most of the electric cars and also they have Tesla :).  We’ll see if they turn electric or find another solution (hopefully not another tehnological breakthrough such as fracking).

    #1943

    Electric Ali
    Participant

    With regard to Chinese oil, China’s largest oil fields are mature and production has peaked, leading companies to focus on developing largely untapped reserves in the western interior provinces and offshore fields. It is thought that Chinese oil production will peak sometime this decade.
    So even if consumption was to remain steady (pretty unlikely), once production decline starts, you have to import more and more oil just to keep consumption constant.
    Others are predicting an approximate 10% per annum crude oil import increase for China in the next decade or so. A 10% increase represents a doubling in about 7 years. PFC Energy give a figure of 4 MB/d in 2008 and 8 MB/d in 2016, a doubling in 8 years.
    http://www.crudeoilpeak.com/wp-content/gallery/aspo2009/china_oil_import_needs.jpg

    #1944

    PerLyngemark
    Participant

    Mitsch: Currently fuel prices in China are around 7.5RMB/liter, while the US a liter costs 5.90RMB and in Sweden about 15RMB/liter. Last week I posted some charts on my Facebook (facebook.com/perlyngemark), not sure if you can see it or not. It’s true as you said, there are no buffer on the US gasoline prices and the buffer in China is very slim as well. All people complain about gasoline prices here, and any increase will be met with severe protests. That’s probably why the government didn’t dare to increase them last month during our worst smog ever (Beijing had up to 868 (PM2.5), where levels above 50 are unhealthy…).

     

    Electric Ali: It’s very hard to predict the oil usage in China the coming years, if the government are getting more serious (people were urging them during the last months smog) to clean up the pollution they might decide to curb coal and oil usage.

    If you look on the BP data you can see a much sharper increase in coal (compared to oil) usage in China these past 10years. China is a net importer of both coal and oil and any new fields they might discover in the western regions are unlikely to be very large. If they decide to curb coal more than oil, we might see more than 10% increase in oil usage, which will have catastrophic repercussions on oil prices.

    In my opinion the easiest way for China to curb coal usage would be to update the building codes and require insulation. I’m renting a new apartment (costs more than a million USD to buy), I have between 9 and 11 degrees Celsius indoors. Turning on more than two heaters will fry the fuse… I can get up to 15 degrees at the most in one room… In the summer it’s reversed, I will be sweating in 35-40 degree temperatures.

    With insulation we should be able to live comfortably here and save tons of electricity and it would not affect house prices at all. To build 1m2 apartment costs 800rmb, with insulation about 2400rmb and the average apartment in Shanghai is sold around 30,000rmb/m2.

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