Rising Oil Demand: What It Means for Investors
BP (NYSE: BP) last month released its Statistical Review of World Energy 2019. The review provides a comprehensive picture of supply and demand for major energy sources on a country-level basis. It is the bible of global energy statistics.
This year’s review demonstrated that the world is as power hungry as ever. New world records for consumption were set in nearly every category. Today I want to cover global petroleum trends. The energy sector and broader stock market often move in tandem, so the fortunes of oil and gas can affect all investors.
You may have seen me argue here that the world is millions of barrels away from peak oil demand. I have made this argument in response to arguments that electric vehicles were on the cusp of causing oil demand to decline. Many writers have echoed this theme, and I believe this perception has helped drag down global oil prices.
Two years ago in Forbes magazine I argued that Peak Oil Demand Is Millions Of Barrels Away. This marks the second BP review since I made that argument, and the latest review shows that global oil demand has grown by 3.1 million barrels per day (BPD) since that article was published.
For 2018, the review reported that the world set a new oil consumption record of 99.8 million BPD, which is the ninth straight year global oil demand has increased. Oil demand in 2018 grew by 1.5%, ahead of the decade-long average of 1.2%.
The United States remains the world’s top oil consumer, averaging 20.5 million BPD in 2018. China was second at 13.5 million BPD, and India was third at 5.2 million BPD. Both China and India have averaged oil consumption growth of at least 5% per year over the past decade.
The review also reported a new global oil production record in 2018 of 94.7 million BPD,1 an increase of 2.22 million BPD over the previous year.
The U.S. extended its lead as the world’s top oil producer to a record 15.3 million BPD.2 In addition, the U.S. led all countries in increasing production over the previous year, with a gain of 2.18 million BPD (equal to 98% of the total of global additions).
Looking at a longer period, in 2008 global oil prices first exceeded $100/bbl. Since then, global oil production has increased by 11.6 million BPD. Over the same time span, U.S. oil production increased by 8.5 million BPD, equal to 73.2% of the global increase in production. I would argue that without the U.S. shale oil boom, oil prices would have never dropped back below $100/bbl.
Saudi Arabia was the second-leading producer last year at 12.3 million BPD, while Russia came in third at 11.4 million BPD. Canada added the second-most production in the world, with a 410,000 BPD gain over 2017. This was just ahead of Saudi Arabia’s 395,000 BPD increase.
These gains helped offset declines from Venezuela (-582,000 BPD), Iran (-308,000 BPD), Mexico (-156,000 BPD), Angola (-143,000 BPD), and Norway (-119,000 BPD).
This year, for the first time, the review reported the contribution to overall oil production by natural gas liquids (NGLs). U.S. NGL production is by far the highest of any country at 4.3 million BPD (a byproduct of the shale gas boom). That’s more than the entire Middle East, and accounts for 37.6% of total global NGL production.
When NGLs are subtracted from overall oil production, U.S. production declines to 11.0 million BPD. This places the U.S. just behind Russia (11.2 million BPD) and just ahead of Saudi Arabia (10.5 million BPD).
One might suspect that an industry in which production is increasing at a robust pace year after year is a great place for investment. That’s only partially true.
U.S. oil production has surged over the past decade, but U.S. oil producers have fared poorly. That’s because they keep pushing production ahead of demand growth. Hence, they haven’t been in a position to profit from this production surge, because there are too many producers eroding margins. The same is true in the U.S. natural gas industry.
Pipeline companies, on the other hand, have fared much better. All that new oil, natural gas, and NGL production has to get from the field to the consumer. The pipeline companies make this happen, and to do so they sign up producers to long-term contracts. That’s what makes them such good long-term investments. There’s still risk there, but it’s much lower than with the producers.
The other sector that has fared especially well are the refiners. They have taken advantage of low domestic crude oil prices, and have increasingly shipped finished products into the export market. There, prices are more influenced by global supply and demand, which has proven favorable to the refiners.
1. According to BP, the differences between world consumption figures and world production statistics are accounted for by stock changes, consumption of non-petroleum additives and substitute fuels, and unavoidable disparities in the definition, measurement or conversion of oil supply and demand data.
2. BP’s definition of “oil” includes NGLs, which have surged in the U.S. along with natural gas production. This is the primary reason BP’s oil production number is higher than numbers reported by the U.S. Energy Information Administration.
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