Ample oil supply in a demand-constrained world: Fuel for Thought

Anyone looking for clues as to the direction of global oil demand would be well advised to count the number of electric bicycles dodging traffic in China’s streets.

It was once held that if all of the hundreds of millions of Chinese bicycle riders were to buy a car, oil demand there would jump by—pick a big number—xx%. But rather than abandoning bicycles for cars, many Chinese just upgraded to electric bicycles.

By 2013, the number of electric bikes on the road there had experienced a thousand-fold increase in 15 years; roughly 200 million are now in use in China, a number expected to reach 250 million by decade’s end. Cost is a factor, as is Chinese cities’ terrible smog. But the biggest factor seems to be convenience—more easily navigating the gridlock in China’s big cities.

Shifting US driving patterns

A similar shift in driving patterns may be happening in the US, still the world’s largest consumer of oil for transportation.

After stagnating in the wake of the Great Recession, US gasoline consumption rebounded to record levels in 2016. But on a per-capita basis, there has been a sharp fall-off in the number of vehicle miles traveled (VMT). Currently, the US Energy Information Administration forecasts that VMT growth overall will drop by -0.2%/year to 2050.

The automobile became a disruptive change in American life because it represented the ultimate convenience in mobility. But it seems that America’s youth just aren’t all that into cars anymore. According to the US Department of Transportation, 30 years ago nearly three-fourths of American teenagers had drivers’ licenses; by 2011, that share had dropped to half.

Then there’s the lure of telecommuting: nearly one-fourth of all employed persons in the US do some or all of their work at home, according to the latest Bureau of Labor Statistics estimates.

The past may not be prologue for oil demand

The future increasingly looks to be demand-constrained for oil, even as current and potential future supply of oil looks more plentiful than ever. And that may not be such a bad thing, if it means fewer, less severe cycles and stability in planning.

But it also would mean that oil and gas drilling decisions increasingly will be made at the economic margin, with a relentless focus on curbing costs and bolstering operational efficiencies.

Recent drilling and completion trends that Platts RigData tracks already point to an outlook of continued growth in oil supply despite the drop in oil prices since 2014.

In 1Q 2017 US land rig counts were up year-over year (+51%), as were well counts (+67%), wells per rig +10%), and oil IP (initial production) rates (+7% on average). Well costs generally are holding steady.

A robust debate over the future of oil demand emerged at the S&P Global Platts North American Crude Oil Summit, held in Houston last month.

Kenneth R. Medlock III, senior director, Center for Energy Studies at Baker Institute, Rice University, contends that low-ball projections for oil prices based on sluggish demand growth “ignore timeproven fundamentals.”

Developed areas worldwide are populated by 1.3 billion people out of the 7 billion people on Earth, he noted, predicting that 400 million–500 million people will be moving into the middle class globally and will make more purchases requiring energy inputs such as cars, which will increase demand for crude.

But Suzanne Minter, director of strategic industry analytics at Platts Analytics, suggested instead that, “The emerging middle class around the world is not the same as in the US and may not develop along the same line that we have and do.”

Minter may have been talking about examples such as China’s electric bikes, but her comment could also apply to secular changes in the US.

These indicators point to ample supply of oil continuing, but the caveat is that it might come in an increasingly demand-constrained world.