Oil Demand's Triumphant Return

By: Frank Holmes | Sun, Dec 5, 2010
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Man in Oilfield

Lost in the shuffle of the European debt woes, a second round of quantitative easing and gold's record run has been the resurgence in global demand for oil. Global oil demand is strong; in fact, it has never been stronger. Oil demand during the third quarter of this year was up 3.7 percent, the fourth-straight quarter of growth.

Who's behind this increase in demand? Emerging markets.

You can see from the chart that global oil consumption has bounced well off of early 2009 lows and now exceeds pre-crisis consumption levels. Consumption in the developed world, represented in the chart by the Organization for Economic Co-Operation and Development (OECD) countries, has been flat for the past 18 months and remains roughly 8 percent below 2007 levels.

Global Oil Consumption

While developed world demand has flatlined, emerging markets have captured a significant share of global oil consumption over the past three years -- narrowing the usage gap between the two from roughly 12 million barrels per day in 2007 to 4 million barrels per day currently.

This week, Dr. Fatih Birol of the International Energy Agency presented his bullish long-term outlook for oil demand to analysts at Barclays, predicting that global energy demand will grow by 36 percent between 2008 and 2035. Birol says China and India will lead the way but the Middle East won't be far behind.

He gave three reasons for the demand leadership of emerging markets: Economic growth, population increases and heavy fuel subsidies in many countries will give consumers a buffer from rising oil prices.

Chinese oil demand is expected to grow at the fastest rate of any country in the world at 10.4 percent this year. Figures on China's share of global oil demand growth range between 25-40 percent but there's no question that there is still substantial room for Chinese demand to grow.

Fabulous growth in auto demand will likely be the catalyst for China. Birol says that 700 out of every 1,000 people in the U.S. and 500 out of every 1,000 in Europe own cars today. In China, only 30 out of 1,000 own cars and Birol thinks that figure could jump to 240 out of every 1,000 by 2035.

When Japan hit $5,000 of GDP per capita, oil demand grew at a 15 percent annual rate for the next ten years, according to oil-industry consultant firm PIRA. It was a similar story for South Korea. China reached the $5,000 GDP per capita mark in 2007 but oil demand has only grown at a 7 percent compounded annual growth rate. This highlights China's superior growth potential if China is to catch up to historical patterns.

Macquarie expects global oil demand to grow by 2.3 percent on a year-over-year basis in 2011, which the firm says would be met with drawdowns in oil stockpiles, higher prices and an OPEC response.

However, OPEC's ability to control the oil market is in a precarious state. Ten of the cartel's 12 countries will produce less oil in 2011 than they did in 2008, with Iraq and Nigeria the only countries expected to see production increases.

OPEC still controls 40 percent of the world's oil supply but its spare capacity peaked in the early 1980s and is projected to fall an additional 2 million barrels per day in 2011, leaving the cartel with little ability to manipulate production as demand continues to grow.

Rising demand from emerging markets and a lack of maneuverability by OPEC should result in a very tight global oil market. We expect oil prices to continue trending upward throughout 2011.

 


All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

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