Musings On Oil Demand

Disclaimer: this is not an investment blog. Do not make any investment decisions based on anything you read here or think you may have read here.

Four data points:

• Warren Buffett takes huge stake in XOM
• George Soros' new stakes in HAL, SLB, BHI, CVX, and Delta
• The incredible presentation posted just a few days ago
• China relaxes its one-child rule

Then, some minor points

• The president's green energy adviser steps down this past week
• EPA cuts back on ethanol mandate; back to 2007 levels

Earlier in the week, Don sent me the PDF/presentation that is linked above. I went through it quickly when I got it, but today I have a bit of time to go through it much more thoroughly. It's an incredible presentation. It's worth spending some time on every slide.

So, let's do that. This presentation is a continuation of the discussion on the global implications of shale oil and energy independence in the United States.

In the very first slide (of substance), there are two graphs: US oil production and North Dakota oil production. The presentation is dated October, 2013. The Eagle Ford has surpassed the Bakken daily production, and yet the graph selected to get one's attention: North Dakota production, 1997 to 2013.

The small print on the very next slide is the important takeaway: the implication of the Bakken was that there would be "an abundance of oil and gas supplies [going forward]; and, that [this abundance] would result in the widespread substitution of gas in the transportation sector which would lower demand for oil as well."

Skip ahead to slide #25 to see the reality. On that slide there are two graphs. The one on the left is most remarkable. Again, the small print is the takeaway: "While some substitution [of natural gas for diesel] in the trucking and rail fleet is likely, penetration into the auto sector will be extremely limited."

How limited? Look at the graph on the left hand side of slide #25, "US gas-fired transportation as percent." The curve, beginning in 2010, is absolutely flat, at less than 0.5%, and remains flat until 2024, well beyond my investing lifetime. It doesn't get to 1% until about 2028. It will be 2032 before US gas-fired transportation gets to 2% penetration. There are investment niches, but that's all: niches.

Back to the early slides.

Demand: slide #13 suggests that an increasing demand for oil in the US and Europe is now reality. Note: the bars represent changes year-over-year, so the spike in 2010 only reflects how bad the recession was in 2009.

The title of slide #15 is interesting: "Non-OPEC supplies: it is still all about shale." Again, these are year-over-year changes. Notice the increase in US oil production [shale] year-over-year, vs the significant decline year-over-year production in the rest of non-OPEC countries [non-shale].

Slide #15 is only half the story, though. Look at the very next slide. This is personal for me. I bought shares in a Brazilian oil company early on, but quickly sold them when it was noted that Brazil was experiencing significant difficulties in developing their off-shore industry. Reality struck home when the stars aligned badly for the Brazilian oil and gas industry: a) Brazil will host the 2016 summer Olympics; and, b) the Deepwater Horizon/Macondo gulf blowout in 2010. At that moment it was obvious the Brazilians were not going to risk their white sandy beaches to an oil spill.

So, slide #15 is only half the story for non-OPEC production. Look at slide #16. Look at the year-over-year change in production for Brazil and for the former Soviet Union states. The FSU is recovering, but look at the y-axis. At best we're talking about 200,000 bopd increase year-over-year. That's for the entire FSU (Russia, Azerbaijan, and Kazakhstan); compare that with five or six counties in western North Dakota producing 800,000 bopd.

Slide #17: OPEC is also under pressure. Look at the volatility.

I was under the impression that US oil stocks were significantly higher based on snippets of CNBC reporting over the past several months, but slide #18 suggests otherwise. We are well above the 5-year average (but most of those years were notable for the severe US recession). However, for the past few months, US crude oil stocks have actually been below the similar period in 2012. There is now an uptick. It would be interesting to see the graph a year from now.

But then, for the Bakken folks, look at slide #19. Look at Cushing crude oil stocks. Spend some time on the graph on this slide (the graph on the right). Spend a lot of time on that graph for two reasons:

• First, this is where I'm going to stop.

• Second, back to the graph. Look at that graph on the right hand side of slide #19. Look at the lines, and then look at the small print: "Cushing stocks will fall to levels below 30 million bbls by early November, when Keystone XL South requires line-fill." I posted that earlier this year. 

Note the "operational minimum" line:about 29 million bbls.

I will stop here. But again, every slide has something important to say.

If you don't believe me, look at the per capita consumption of oil, in bbls per person per year, slide #24, and compare the US with China. I can't imagine the bars decreasing much more for the US in the short term (in fact, I wouldn't be surprised if 2013 figures for the US were slightly higher than those for 2012). And when you look at the graph on the left side of that slide, remember: the population of the US is about 325 million; the population of China is about 1.35 billion.

Oh, one more thing: China is relaxing its one-child policy. That speaks volumes.

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For Archival Purposes

Two stories that may be the top stories for 2014:

• ObamaCare
• China's new one-child policy

ObamaCare will play out in two arenas: a) political arena; b) dollars-and-cents arena. There will be winners and losers in both arenas.

China's new one-child policy has many story lines:

• China concerned about its aging population (think Japan)
• Chinese leaders feel comfortable; they have consolidated their power
• Chinese leaders comfortable about their economy
• Energy consumption will increase 
• The US: 4 million births/year; China 15 million births/year (new policy will increase rate by 1 million new births/year (a quarter of the number of US births)