21 January 2009

Peak Demand?

Slump raises spectre of peak oil demand

Oil demand may never return to growth in the US, Europe and parts of Asia, easing the strain on long-term supplies and prices as emerging countries burn ever more fuel. The surge in oil to a record near US$150 a barrel last year heightened concern the world will run out of crude and supply will start to dwindle--a theory known as "peak oil." Now a deepening recession and oil price collapse have raised the issue of whether demand, not supply, is nearing its peak. US February crude, which expired Tuesday, settled up $2.23 at $38.74 a barrel, while March crude fell $1.73 to $40.84 a barrel. London Brent fell 88 cents to settle at $43.62. "There is a reasonable likelihood that OECD oil demand has peaked," said Peter Davies, former chief economist at BP who was in charge of preparing BP's annual Statistical Review of World Energy, a standard reference work. Among OECD economies, the US had sustained robust oil demand growth due to an expanding economy and less focus on conservation, while western Europe and Japan were posting declines. US patterns could be about to change as the recession erodes consumption. By the time rich countries return to economic growth, their efforts to use less oil and slow the impact of global warming could be taking hold. However, the peaking of OECD demand will not choke off growth in oil consumption worldwide for the foreseeable future as emerging economies expand and billions of people seek to improve their living standards. "The West no longer rules the world," said a senior oil executive who requested anonymity. "Whatever the OECD is doing, it will not prevent worldwide energy consumption from growing, due to emerging country growth."

Meanwhile, Gary Dirks, president of BP for Asia-Pacific, said it is impossible to tell how much deeper oil prices will fall this year as demand for energy shrinks for at least the next 12 months. He also warned that decisions to delay investment in "diverse" energy sources because of the current global economic downturn will create a "black hole" in international energy supplies in years to come. "Big energy projects take 10 years. If we see a pause in investment today, we will not see the impact for 10 years," said Dirks at the Asian Financial Forum in Hong Kong. His comments echo fears expressed by the International Energy Agency, which said last year long-term energy supplies are insufficient. The IEA estimated $26-trillion will have to be invested between now and 2030 to avoid a crisis. Even that level of investment might not be high enough, Dirks said.

In related news, Deutsche Bank said in a report that the crude-oil market needs more speculators to help stabilize prices six months after the traders were blamed for pushing the commodity up to its record highs last year. A lack of liquidity is distorting prices, particularly for near-term delivery, amid an oversupply of oil at Cushing, OK, said analysts led by Paul Sankey in New York in the Deutsche Bank report dated yesterday. This is sending the "wrong" price signals to refiners and producers. "We clearly have a fundamentally imbalanced market, with far too much crude, that needs to be resolved," the analysts said. "We need more market activity to correct these issues, but for technical, political and financial reasons, the liquidity of the market has dried up and the long-term price of oil is partly distorted." Analysts added, "We are now in an over-supplied bust cycle, and we need lower prices either to encourage demand or decrease supply. Production cuts by the Organization of Petroleum Exporting Countries haven't helped enough because lower oil prices haven't spurred an increase in demand."
(National Post, Calgary Herald 090121)

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