Citigroup Inc. has announced that its projections show an increasing disparity in oil prices, suggesting that oil demand will plateau by the end of the decade. Citigroup’s most recent report indicates that oil prices will remain low for the foreseeable future as demand for natural gas will cause the demand for conventional oil to level off.
This directly contradicts the general consensus by the oil industry that global oil demand will continue to grow past 2030. This assumption is based on the strong growth of the oil industry in the past 20 to 30 years.
“Several developments in fact give reason to question the consensus and raise the possibility that the tipping point for oil demand may come much sooner than the markets are expecting,” said Seth Kleinman, head of energy strategy for Citibank.
Most analysts have held to the hypothesis that oil demand will increase as emerging markets demand more energy. Some have even argued that “peak oil” — the hypothetical situation where oil demand exceeds oil supply — may be coming in the next couple of decades, spiking prices. Earlier this month, the Organization for Economic Cooperation and Development argued that oil price may reach between $150 and $270 per barrel by 2020, buoyed by increased demand by China and India.
Fears that the world’s petroleum reserves are not as vast as reported has also raised speculation. Cables to Washington, released by WikiLeaks, urged Washington to take seriously a warning from a senior Saudi oil executive that the kingdom’s oil reserves may be overstated by as much as 40 percent.
Citigroup argues that “peak oil” is not likely. As China and India ratchet up their demand for oil, the United States is lowering its demands on the global supply. This will lead to equilibrium in the market. In addition, there are indications that China and India intend to capitalize on the affordability of natural gas currently.
Shale gas hydraulic fracturing has created a situation in which natural gas is atypically cheap. This has led many businesses to increase its natural gas use. There have also been an increased push to use natural gas in applications traditionally held for petroleum, such as automotive fuel. Many countries now use natural gas for power generation instead of oil, due to the lower price point.
“As much as two million barrels per day of power generation demand in the Middle East in total could be switched to natural gas by the end of the decade, and the increasing availability of LNG [liquefied natural gas] towards end-decade could back out other oil for power generation needs in India and Latin America amongst others,” Kleinman said.
China currently has a fleet of more than 40,000 liquefied natural gas (LNG) trucks and a network of 1,000 LNG filling stations in more than 80 cities slated to be open by the end of the decade, with plans to double this. Canada, Russia and India are testing LNG-powered trains, and BNSF Railway Co. — a division of Warren Buffett’s Berkshire Hathaway Inc. — has plans to operate six LNG engines in 2013.
Liquefied natural gas (LNG) is natural gas that has been cooled to minus 260 degrees Fahrenheit under normal pressure to force a condensation to liquid form. This methane in liquid form can now be carried by transport without the need of establishing extensive pipelines or the fear of accidental ignition, making LNG — while expensive to manufacture — exceedingly cheap to move.
In addition, improved fuel economy with today’s cars and trucks is reducing the amount of oil needed to operate the nation’s automotive fleet. “As cars make up roughly 60 percent of the total global road fleet we conservatively estimate that new vehicles (cars and trucks combined) fuel economy increases by 2.5 percent per automobile,” Kleinman said.
Expectations of a surge in oil production for Iraq and Venezuela led to market speculation and a propping up of commodity prices over the last decade. This trend is subsiding. Kleinman projects that the Brent prices for oil will be at $80 to $90 per barrel by the end of the decade, compared to the Brent price Tuesday of $108.27 per barrel. This means that the decline of the global oil demand will comes well short of 2030.
Per consumable British thermal units, crude oil is currently selling at about four times the price of natural gas, according to Bloomberg.
The International Energy Agency (IEA) commented early this month on the soaring American oil production rates. “The oil-producing world today is in the midst of a once-in-a-generation transition of far-reaching consequences,” the IEA said. “Rarely has the market’s ability to withstand crisis been so tested as in the two years since the start of the so-called Arab Spring. Yet the market seems to have taken it all – civil uprisings, terrorist attacks, natural disasters, production outages, trade embargoes – in its stride.”
The IEA expects that non-OPEC (Organization of Petroleum Exporting Countries) oil supply will grow by 1.1 million barrels per day (bpd) in 2013 to 54.5 million bpd. At the same time, the IEA has reduced the estimate for demand of OPEC’s crude oil by 100,000 bpd to 29.7 million bpd, due to rising competition and a weak global economy. OPEC currently expects the U.S. oil demand to rise by 580,000 bpd in 2013, which may be inconsistent with industrial slowdowns, due to sequestration and the increase in domestic production.
Last November, OPEC admitted for the first time that hydraulic fracturing (“hydrofracking”) will change the global oil demand picture significantly. “Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium- and long-term supply prospects,” the Organization of the Petroleum Exporting Countries said in its 2012 World Oil Outlook report.
Previously, OPEC felt that the American shale oil boom would have minimal or no effect on the global oil market. The reduction in global oil consumption by the United States — the world’s largest oil consumer — threatens the economic viability of many OPEC nations. Bahrain, for example, is currently running a deficit economy that must be sustained regularly by Saudi Arabia. Bahrain’s economy is dependent on oil exports; a drop in global oil prices will deepen Bahrain’s economic crisis.
Many of the other members of OPEC may face a similar fate. Riyadh sets its target price at over $100 per barrel, but with expectation of a price slowdown, Saudi output is slowing to anticipate the lower demand. In addition, expectations that China will demand more oil in the future has faded, in part due to a slowdown in China’s economic growth, a new reliance of LNG and weaknesses in the global economy.