The world

The Factors

  • GLOBAL ECONOMICS

    Global economic growth is closely connected with increased oil consumption. Typically, slow or no economic growth globally results in low or no increase in oil consumption; significant economic growth will lead to increased oil demand. Eventually, global growth will occur as developing nations grow, driving up oil demand. Uncertainty remains, however, about global growth in the next three to five years.

     

    Growth occurs in two worlds: the developed world and the developing world. The U.S., E.U. (developed), and China (developing), make up approximately 50 percent of oil consumption in the world. Currently, much of the developed world is experiencing a major slowdown in demand growth. For example, the E.U.’s oil consumption declined 2.4% each year since 2007 and U.S. consumption has largely stagnated since 2008. China, the largest developing economy, saw its explosive consumption growth slow significantly in 2015 due to economic troubles. The U.S., E.U., and China with a few other developed nations, make up the majority of oil consumption in the world today. However, flattening population growth, efficiency standards, and alternative fuel vehicle adoption are likely to keep their demand growth relatively flat. An increase in use due to low prices may occur in 2015, but overall demand growth in these nations will likely remain slow.

     

    For that reason, major increases in  global consumption will primarily happen in developing nations. These countries currently use significantly less oil per capita than developed nations, but this gap will shrink over time as citizens of developing countries gain access to vehicles and other amenities. In the long-run, oil consumption will increase—the question that remains is how rapidly these countries will develop.

     

  • DEVELOPING WORLD ECONOMICS

    China’s oil consumption has expanded quickly for the past two decades lifted by enormous economic growth. Demand growth in China is beginning to slow however due to an economic downturn this past summer. There are few indicators that demand in these three regions will change drastically in the near-term.

     

    The potential demand growth in developing nations is enormous—quick development of even a few countries could spur global demand. India is a specifically important player in oil consumption in coming years. Their burgeoning population and economic advancements are increasing the size of the middle class, and have significantly increased vehicle ownership. Some estimate India could even become the 3rd biggest oil consumer in the world during 2015. Other nations are also increasing their consumption as they develop. As a result, the developing world will be fundamental to the future of oil production, consumption, and prices.

     

  • INTERNATIONAL AGREEMENTS & REGULATIONS

    Free trade agreements and vehicle efficiency standards across the globe impact the oil industry directly and indirectly. The recently signed but yet-to-be-adopted Trans-Pacific Partnership is a great example of indirect impacts. Despite having few provisions that directly relate to oil, the agreement briefly lifted oil prices as investors expect the agreement to increase economic growth and spur oil demand.

     

    However, vehicle efficiency standards in any nation can cause demand to flatten by reducing the overall need for fuel. By 2013, nine countries covering 80 percent of the motor vehicle market had adopted vehicle efficiency standards. Evidence of vehicle efficiency measures flattening demand exists in the U.S., where consumption remained below 20 million bpd (barrels per day) since 2007, despite economic resurgence after the 2008 recession.

  • SANCTIONS

    Sanctions restrict trade with a specific country or group of countries and often target energy development and exportation. Sanctions placed on high-demand or high-production countries have the largest impacts on global oil supply and demand.

     

    Although sanctions can be designed to directly decrease production, they can also decrease oil demand within the sanctioned country. For example, current sanctions on Russia and Iran (both large producers) affect the oil market significantly. Sanctions on Iran for nuclear weapon development have decreased their oil production by approximately one million bpd. Meanwhile, recent sanctions imposed on Russia for their annexation of the Crimean Peninsula have significantly impacted their economy and reduced non-military oil demand.

     

  • TECHNOLOGICAL ADVANCEMENTS

    Technological advancements will dictate the fiscal feasibility of continued oil production, determine the competition to traditional fuel, and increase the level of demand for oil across the globe. Technological advances affect the oil industry in four primary ways:

     

    Improved oil extraction and refinement: Oil extraction technology (like horizontal drilling, oil shale, and tar sands extraction) can significantly increase the amount of oil extracted from each well and/or the amount of recoverable oil globally.

     

    As refinements in these processes and technologies progress, oil production will continue to get less expensive allowing companies using new technology to compete in low cost environments.

     

    Improved efficiency: As vehicle efficiency improves, demand for oil from developed nations will likely stay relatively flat. However, new vehicle and transportation markets in the developing world will likely increase consumption regardless of efficiency measures.

     

    Alternative fuel development: Electric cars, natural gas vehicles, hydrogen cars, and solar cars are all competing in the motor vehicles market. To date, the impact has been negligible, but these technologies have the capacity to significantly decrease demand if the technology improves and is widely adopted.

  • REGIONAL & GLOBAL WARS

    Regional and global wars typically affect oil production in one of three ways: 1) wars impact producing regions and producing nations, decreasing their ability to supply oil to the global market. 2) War can increase a country’s demand for oil as they supply their troops. 3) War can decimate oil demand in countries that experience significant destruction, resulting in economic depression.

  • OPEC PRODUCTION LEVELS

    The Organization of the Petroleum Exporting Countries (OPEC) is a group of 12 oil producing and exporting countries that traditionally  contribute roughly 40 percent of annual global oil production. OPEC sets oil production limits for its members to reduce oil market volatility and to protect oil prices. It has traditionally used its production flexibility to counterbalance shifts in the market resulting from increased non-OPEC oil production, increased oil demand, or supply shortages. OPEC generally meets to determine their production cap every six months.

     

    OPEC’s decision to raise, lower, or maintain its production level plays a significant role in the price of oil. Typically, increased production results in reduced prices, maintaining production leads to relatively stable prices, and decreasing production increases prices by removing supply.

     

    In November 2014, OPEC decided to maintain a 30 million bpd production cap despite significantly increased production from non-OPEC nations. This drove prices to a five year low. In June 2015, OPEC maintained its 30 million bpd cap, resulting in prolonged low prices. OPEC’s upcoming production decision (Dec. 4, 2015) will play a significant role in oil prices for the short and long term.

  • NON-OPEC PRODUCTION

    Non-OPEC production exploded after 2010, led primarily by fracking in the U.S. and other technological advancements enabling traditionally non-producing countries to enter the market. This resulted in significant increases to supply with no governing body to regulate the amount of production (i.e. OPEC). This was a primary factor in the 2014 price drop  and will affect the future of oil development across the globe.

Map of Factors

Click image to enlarge

The world

CANADA

U.S.

Greece

EU

IRAN

RUSSIA

CHINA

IRAQ

OPEC

Brazil

JAPAN

INDIA

The Canadian Association of Oil Producers expect production growth within Canada to slow considerably from their 2014 estimates (6.4 million bpd by 2030 in 2014 down to 5.3 in their 2015 forecast). This is a direct result of low oil prices. Recognizing the importance of continued infrastructure development to successfully reach this goal, they are planning to increase transportation and access to ports and pipelines that can carry their heavy crude to the US and abroad. They expect production levels to climb 1.6 million bpd, or 43 percent increase over their 2014 production by 2030. A newly elected, liberal Prime Minister and new regulations addressing potential environmental concerns from oil sand development could change these estimates significantly.

Since 1975 the Energy Policy and Conservation Act (EPCA) has  banned export of most US crude oil. Many economists believe this regulation is to blame for the significant price gap between West Texas Intermediate (WTI) and other US crude oil prices and global benchmark oils (like Brent crude). It creates a captive market which refineries can discount more than they could in a true free market. Lifting the ban is a policy initiative for several current Congressional Representatives, and legislation has been proposed to do away with the ban. President Obama, however, has openly stated he opposes lifting the ban.

Despite agreeing on a bailout package with EU leaders, the debt crisis in Greece is likely to flare up again when the money from the current bailout runs out. This means the problem has not gone away, it has simply been pushed down the road. It is likely to be a continuing problem for Europe’s slow moving economy.

 

While Greece is only a small percentage of the EU’s economy is made up of Greece, a Greek exit would call into question the entire Eurozone experiment and would likely result in reduced investments within the economy, slowing the economy further or perhaps even grinding it to a halt. This would drive EU member states oil consumption down, but more importantly have a negative effect on global growth, resulting in low oil-demand growth across the globe.

The European Union is facing several simultaneous crises that threaten its long term growth. French and German growth have slowed, the Greek bail-out crisis, and the current influx of refugees from Syria, Iraq, and North Africa could prolong the slowdown and exacerbate currently stagnated economic conditions. These factors have resulted in declining oil consumption for France and flat consumption from Germany. More important than their actual consumption is the impact of the prolonged slowdown of European economies on developing countries. As European economies shrink or stay the same they do not consume enough products to drive growth in manufacturing and production oriented economies across the globe, leading to lower oil consumption in these countries as well.

Iran sits on the precipice of expanding their oil production by 30% (of their April 2015 production) as a result of sanctions that are likely to be lifted by the US and global partners resulting from a nuclear weapons agreement with Iran reached in July of 2015. According to Iran’s Oil Minister, an estimated 1 million barrels could quickly go back to market without significant investment in wells or infrastructure development. Should the deal go through as planned, the additional million barrels of oil could hit markets within months, likely leading to price-drops or a production adjustments on the part of Saudi Arabia and other OPEC countries.  There remains skepticism from many oil industry experts who believe bringing the million barrels on in such a short timeperiod would be extremely difficult. They claim the current infrastructure and workforce could not support the increase. Time will tell who is more accurate.

 

Significant concern that the deal is not valid remains on the part of Americans citizens and lawmakers alike, however attempts to block the agreement have failed to get past a filibuster by Senate Democrats, and the sanctions will start being removed in coming months.

Source: EIA; Bloomberg News

On the wings of economic sanctions from the US and the EU, Russia’s economy has suffered terribly. In what appears to be an effort to maintain money flow, jobs, and revenues, Russia’s oil production has stayed surprisingly high despite the sharp drop in oil prices. Similar to Venezuela and other oil dependent nations, Russia has little choice but to continue production in hopes that Saudi Arabia, the US, and/or other major oil producing nations will decrease production to help prices rebound. Simply put, they cannot afford to lose their current market share, regardless of how low oil prices drop.

Source: EIA

After years of market and currency manipulation, Chinese markets saw a large drop in stock values, and many sluggish economic indicators suggesting that “overall, the [Chinese] economy is very weak” (Zhoa Hao, Commerzbank AG, NY Times). These factors resulted in a slowdown in growth, year-over-year that indicates the previously booming Chinese economy may be flattening. These indicators culminated in Chinese growth reaching a five year low, with many analysts suggesting it is but the beginning of a long term slowdown. As the primary driver of oil consumption growth, the Chinese slowdown is affecting oil demand globally, thereby playing a significant role in declining oil prices.

Source: EIA; Ny Times; The Economist; Multiple Others

The Islamic State has largely been bogged down inside Iraq for several months (despite gains in other countries). Still, the effects of ISIS are being felt across the oil industry in two ways:

1. ISIS is selling an undocumentable amount of oil from fields in Iraq and Syria and refineries it owns to neighboring states on the black market at a discounted rate, decreasing (even if slightly) demand for oil from other countries.

2. In an effort to fund the war with ISIS, Iraq is pumping at nearly 150 percent the rate they were in 2011; this level is much higher than would be expected were it not for the conflict.

 

Iraq has little choice besides producing at current rates as they are not a large enough supplier to affect global prices on their own without removing themselves from the market entirely. For that reason, expect Iraq’s  production to continue at relatively high levels unless ISIS takes more of their oil fields, in which case more crude can be expected to hit the black market.

Source: EIA

OPEC determined it would not adjust its own production levels to protect global oil prices. Saudi Arabia is seen as the driver of the new policy, and Ali Al-Naimi (Saudi Arabia’s Oil Minister) stated that “as a policy for Opec, and I convinced Opec of this, even Mr. al-Badri (Opec Secretary General) is now convinced - it is not in the interest of Opec producers to cut their production, whatever the price is. Whether it goes down to $20, $30, $40, $50, $60, it is irrelevant.” Opec sees new production in the US and elsewhere as a primary threat to their status as top dog in global oil production. As a result they are trying to price higher cost producers (like US fracking companies) out of the industry.

Source: EIA

Quote Source: British Broadcasting Company; November of 2014

It is Central and South America’s largest economy (by GDP). Through 2011 their growth economic growth pattern was among the fastest in the world. However, recent civil unrest, economic uncertainty, drought, and other factors have caused a slide in GDP, and a slowdown in growth of the middle class of Brazil. Despite this, oil demand growth has remained surprisingly steady, as lower prices appear to be driving more consumption. If Brazil and other developing nations economic growth continues slowing, however, global oil consumption is likely to follow because most opportunities for significant gains in oil consumption are occurring in the developing world.

 

A large percentage of Brazil’s production occurs in deepwater sites. These deepwater oil-wells are expensive to operate, and require a high return on investment to operate for a profit. Despite this, huge capital costs associated with their implementation also make taking them offline a difficult prospect for investors who cannot afford to wait it out. Current global prices are far below estimated costs of production in these deep water wells. The likely result is a slow phase out of these wells if low prices persist.

Source: EIA

Japanese oil consumption has declined 12 percent since 2007, and remained roughly 20 percent lower than consumption in the early 2000’s. Economic stagnation alongside efficiency measures are leading to a prolonged decline in oil consumption growth.

India’s growing population and is and will continue to be key to global oil consumption growth. Whether the Indian middle class continues to grow and the country continues to develop will be a key factor in continued growth. The sheer size of their population and their upward trend make continued demand growth likely.

Global Indicators

Developing nations will continue to grow long-term.
International Trade Agreements in the Asia-Pacific region will likely economically benefit member countries.
Most countries have reduced oil production; however, not enough to balance supply with demand.
Low prices will increase availability of fuel and other oil byproducts for poorer global regions.
Sanctions imposed on Russia have forced continued production to maintain their economy.
Technology advances in renewables and alternative fuel vehicles will continue to improve.
Lifting sanctions on Iran will likely bring one million bpd production into the market over the course of a year.
Counties continue to adopt vehicle efficiency standards.
The war with ISIS is forcing high oil production in Iraq to fund their war effort.
Most developed nations' growth rates are stagnant.
Extraction technology advances in horizontal drilling and fracking have opened production in new areas.
China's growth rate has slowed.
OPEC is currently maintaining a 30 million bpd cap which adds to a global oil oversupply.