Economic projections crash into geologic reality.

Kansas City Star Midwest Voices contributing columnist: Robert Anderson

The IMF (International Monetary Fund) and Stuart Staniford (PhysicsPhD) have provided a very important perspective on our current global oil fundamentals. I know most of you won’t read extensive reports on petroleum production and demand elasticity stats so allow me to recap and supplement what Stuart just published.

Here’s the link on the original. You can also check out the accompanying graphs:

Early Warning. The global economy will not grow at 4% for the next 5 years.

IMF Economic Fantasy Land: 4.5% Annual Growth.

Stuart’s taken the recent IMF economic growth projections for the next 5 years – over 4.5% annually – and multiplied this by their oil elasticity figure of .685% to calculate how much oil supplies will have to grow to fuel this economic growth. What does this elasticity figure mean? It means that for each 1% increase in economic growth, oil supplies need to expand by his elasticity factor (.685%), or about 3% annually. If they don’t, the price of oil has to escalate.

Using the IMF growth rate of 4.5% (approximately) and the .685% elasticity figure, global oil supplies would have to expand by 17 million barrels a day during this 5 year time frame. It’s important to recognize this means more than bringing on 17 million barrels/ day of fresh supply. Many of the world’s large fields are starting to deplete so one has to net new supplies against existing field depletion rates. In other words, if existing oilfield output rates drop by 10 million bls/ day during this time frame, we’d need 27 million bls/day of fresh output to net 17.

The other significant problem is large oil production projects generally take more than 4 or 5 years to develop and bring into production. Point being, we already know what’s ‘in the pipe’ during this projected time frame – very little. This is why global oil output has been fairly flat since 2005. Its projected to continue to be. New output really isn’t doing much more than offsetting depletion of existing fields.

As if this isn’t bad enough, here’s another detrimental factor. With high oil prices, oil producer economies are booming. As a result they are consuming more oil locally and exporting less. Most subsidize their retail fuel prices. China and India are also soaking up lots more of what’s available. So let’s combine these and look at the stats on net available oil exports from ‘05 to ‘09:

2005: 46 – 5.2* = 40.8

2006: 46 – 5.5* = 40.5

2007: 45 – 6.1* = 38.9

2008: 45 – 6.6* = 38.4

2009: 43 – 7.3* = 35.7

In million barrels /day.

These oil export stats are provided by WesTexas at http://www.energybulletin.net :

*China & India’s combined net oil imports.

It’s evident ’10 & ’11 figures would continue this trend. So global oil production stats have been steady but the ‘net available exports’ have actually dropped.

What else has happened since 2005? Oil prices have more than quadrupled. These same trends are bound to continue.

Consequently, its ludicrous to project oil production growth of 17 million barrels/ day over the next 5 years. What Stuart Staniford did was temper this down to 11 million barrels /day. But based on current and projected fundamentals, this isn’t doable either.

IMF Growth Projections: Ain't gonna happen!

If there isn’t enough oil to flow into these economic growth projections and those complex economic elasticity factors stay constant, how much does the price of oil have to escalate to compensate for a 1%/ year reduction in global supplies? Stuart figured 53% – each year! We all know our wallets and gas cards can’t handle this! If this is the case, economic growth would be the other variable that would have to drop -along with the demand elasticity figure.

In terms of these IMF projections, something has to give. Either oil prices are going way up or the global economy is going to contract. Or I’d predict both!

In conclusion Stuart figured:

 “I think the IMF’s growth projections are seriously improbable. What is going to happen instead is that people will keep trying to grow without getting much more oil efficient, that won’t work, oil prices will go through the roof, another global recession, or at least a major slowdown, will ensue, and then people will begin in earnest the work of starting to transition away from oil dependence.”

Of course, I’ve recently concluded that Saudi Arabia’s output might have peaked out and will soon be contracting. We’d better not even consider throwing this into the ugly mix.

So there you go. The economists are still figuring that economic growth is back on track, and oil is no more important than any of their other input variables.

They’re wrong. Aren’t they, Stuart?

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About OilisNotWell

I'm a proud, happy 4th generation Kansas Citian. I've been employed in downstream petroleum and biofuels for over 30 years. After eight years as a Refinery Rep and Midcontinent Marketing Manager at Wichita-based Koch Refining, I subsequently set up shop at the KC Board of Trade just off the Country Club Plaza. Back in the old pre-internet days, I actually launched the first faxed newsletter on oil markets in the world. It was highly regarded with 350 subscribers who were oil distributors, traders and oil industry executives. Subscription cost was $760/ year. I also worked for the Hermes Group which was the first Russian company to buy a seat on a U.S. commodity exchange (NYMEX). I wrote their international business expansion plan and traveled extensively throughout Russia, Ukraine and Eastern Europe. I've also literally worked for dozens of ethanol and biodiesel firms in the U.S. I enjoy spending our winters in Uruguay and Argentina when I can swing it.

Posted on April 28, 2011, in Uncategorized. Bookmark the permalink. Leave a comment.

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