By Jeff Rubin
The Globe and Mail
It's Wednesday, and the week's U.S. oil inventories numbers will soon be out. I have no clue what they will say, nor much interest, either. But others do.
Exactly why oil traders and speculators think the data has anything to do with the state of world oil demand is beyond me. I suppose, like Pavlov's dog, they're only doing what they're trained to do. But their training comes from a world that no longer exists.
While the U.S. oil inventories data pertains to the largest oil-consuming nation on the planet, it is no more indicative of world demand than U.S. oil production numbers are indicative of world supply. Both are in terminal and irreversible decline.
It certainly wasn't U.S. fuel demand that took oil prices over $100 (U.S.) in the first place, and it won't be U.S. fuel demand that will push them back into that range any time soon. U.S. oil consumption is almost 3 million barrels per day short of its pre-recession peak — a level never to be regained, just as U.S. motor vehicle sales will never again see the levels that prevailed before the recession. Ditto for oil consumption in Canada, Western Europe, Japan, or, for that matter, anywhere in the OECD economies.
Back in the 1990s, that kind of demand contraction in the OECD would have foretold a big decline in oil prices, since those countries accounted for almost three quarters of global oil demand. Today, they account for barely half, and tomorrow they will account for even less.
Just as the developing world has long surpassed the developed world in terms of coal consumption, the same is about to happen with respect to oil. Between explosive growth in oil-thirsty economies like China and India, and OPEC's voracious appetite for its own fuel, OECD fuel markets are becoming increasingly marginal. That's why Saudi Aramco is far more interested in securing long-term supply contracts with rapidly expanding domestic oil markets in countries such as China and India than in supplying shrinking oil markets like those in the US.
In a world where affordable oil supply will soon peak, if it hasn't already done so, global oil consumption quickly becomes a zero-sum game. As China moves from consuming 8 million barrels a day to 10 million barrels, and OPEC ramps up its own daily consumption from 10.5 million to 12 million barrels, somehow, somewhere else in the world, there must be a corresponding decline in oil consumption. That somewhere else just happens to be the U.S. market and the oil markets of the other OECD economies.
So instead of thinking that a decline in U.S. oil consumption means a build-up in global oil inventories, just think of it as freeing up another barrel to be guzzled in China or the Middle East.
10 March 2010 — Return to cover.