Breaking News: Net Oil Exports Peaked in 2006!
As the economy slowly ‘recovers’, fuel prices will very likely resume the rapid upward trajectory that culminated with the economic crash in 2008. Between 1998 and 2008, the price of oil grew at a compounded annual growth rate of 24 percent – from $17 per barrel to a peak of $147 per barrel (inflation adjusted 2007 dollars). The analysis presented here strongly suggests that the global oil market is supply constrained, so any economic recovery will quickly bring about rising fuel prices. The impending price run will severely constrain economic recovery, and could very well be the factor which turns the recovery around. Why?
Oil Fuels the Global Economy
More than 95 percent of transportation is fueled by oil, and from a goods movement perspective, no immediate substitutes are capable of powering the existing fleets of trucks, trains, ships, and airplanes. This singular fact highlights the vulnerability of globally-oriented economies to oil supply constraints and associated price shocks. Typically, when we think of oil supply, our attention is drawn to production data, but only a portion of the oil that is produced globally is sold on the global market. Importers compete for oil sold on the global market, hence net exports – defined here as the total amount of oil exported from surplus producer countries – offer a far more important measure of supply.
Net Exports Peaked in 2006!
An aggregation of net exports by country reveals that global oil exports peaked in 2006 after making only marginal gains for two consecutive years. An even more troublesome statistic is that global exports were lower by 783,000 barrels per day (bpd) in 2007 than they were one year earlier. To put this amount in context, 783,000 bpd is roughly one percent of global production and nearly two percent of net exports. Despite a tripling in price, global exports were in fact lower in 2008 than they were in 2004. The market clearly provided strong financial incentives for exporters to release more oil to the global market, but very few were able to do so, and a growing number were not.
Figure 1: Global net exports (Calculations based on data from the BP Annual Statistical Energy Review – 2009)
The peak in global oil exports acted as an absolute cap on fuel availability requiring that every additional barrel consumed was bid away from some other competitor. There have only been a few other moments in history when net exports declined forcing a previous consumer out of the market. This time around, this process quickly became very expensive.
When the economy enters recovery and demand resumes, it is likely that we will find ourselves once again bumping our heads against production/export limits. The price of transportation fuels will climb, and the effects of rising fuel prices will ripple through the economy. Just like the 2008 price run, the impending price run will wreak havoc on the most vulnerable members of society (be they businesses or individuals). BTW, the price for a barrel of oil has been flirting with the $90 mark over this last week…
In addition to direct impacts of rising fuel and energy prices, indirect impacts will be felt as well. Nine of the ten largest economies – our most important trading partners – are net importers of oil (the sole exception being Russia). To these economies, a peak or plateau in global oil exports threatens the efficient movement of people and goods thereby impeding economic activity. Under business as usual, as trade goes, so goes the economy.
Though the U.S. is the world’s third largest oil producer, our voracious demand for oil earns us the top spot as the world’s number one importer. The crown for the fastest growing oil importer, though, belongs to our most important non-oil trading partner: China. In 1993, China was a net oil exporter, but by 2008, China was importing more than 4.2 million barrels per day (mbpd) even though they had steadily increased domestic oil production over this period.
Why did exports peak while production continued to grow?
Oil Industry Restructuring
In the distant past, investor-owned oil companies (IOCs) like British Petroleum and Exxon Mobile dominated world oil production. In 1970 IOCs controlled 85 percent of global oil reserves, Russian oil companies controlled 14 percent, and national oil companied (NOCs) controlled only 1 percent. Over the last four decades, the balance of power has shifted dramatically. Today 78 percent of the world’s proven reserves are under exclusive control of NOCs, and another 10 percent is made available under exclusive contract with NOCs. By contrast, the BPs of the world now control only 6 percent of the world’s proven reserves, with the balance falling under the control of Russian oil companies.
Subsidized Domestic Consumption among Net Oil Exporters Creates Market Distortions
Most of the top oil exporters have nationalized oil production. As state sponsored enterprises, NOCs provide a large portion of the state revenues which support federal activities. In this sense, NOCs are guided by the short-term profit motive. But NOCs are also the subject of myriad forces that extend beyond the short-term profit motive. In places like Saudi Arabia, NOCs provide copious amounts of oil to be used for water desalination and electricity generation. Even more importantly, oil is a powerful political tool, which is a source of further disjunction with the world oil market.
Most net exporting nations subsidize domestic consumption by setting prices well below the global market price. When the price for a gallon of gas climbed to $3.32 in San Francisco, the price in Riyadh, Saudi Arabia was 45 cents per gallon, and the price in Tehran, Iran was only 33 cents per gallon (both figures are adjusted to account for differences in purchasing power parity).
Consequently, as the price of oil rises, net exporters enjoy a significant boost to export incomes. In turn, rising export incomes support a variety of domestic investments which create jobs and increase domestic demand for energy and fuel. As a case in point, the average price for a barrel of oil was roughly $50 in 2005 and $100 in 2008. The doubling of price increased Saudi Arabia’s export earnings by nearly $400 million per day, and domestic oil consumption grew by 27 percent.
Demographic Shift among Net Oil Exporters Exacerbates Market Distortions
Among the net exporting countries, domestic consumption is pushed even higher by population growth, and we see that nine of the top ten net exporters are in one of the early stages of the demographic transition. Demographers forecast the populations of these countries to continue to rapidly expand for many years.
Peak Net Oil Exports – The Wolf at the Door
Rising incomes and growing populations drive domestic oil consumption up, and a nation’s net exports peak when the rate of growth of domestic consumption begins to outpace the growth of production. Saudi Arabia – the world’s largest net exporter (8.6 mbpd) – reached peak exports in 2005. For a variety of reasons, it is impossible to know whether this peak was caused by geophysical limits to production or whether Saudi Arabia reduced production for purely political or other reasons.
Indonesia, by contrast, provides the quintessential case study of the peak export phenomenon. Indonesia reached an oil production plateau in 1977 at just over 1.5 mbpd. By 2000, production had declined slightly to just below 1.5 mbpd, but during this period, domestic oil consumption climbed steadily. Despite the elongated production plateau, oil exports clearly peaked in 1977, and declined roughly 72 percent by 2000. Just four years later Indonesia transitioned from being a net oil exporter to a net importer despite the fact that the country was still producing at nearly 70 percent of peak volume.
Figure 2: Oil production, consumption, and net exports/imports for Indonesia (Calculations based on data from the BP Annual Statistical Energy Review – 2009) p.s. you can generate graphs like this using Jonathan Callahan’s excellent and free “energy databrowser“
A similar process is playing out in Mexico today. Both oil production and exports peaked in 2004. At the time Mexico was the number two supplier to the US. Between 2007 and 2008 alone, net exports fell by 22 percent, and at the current rate of decline, Mexico will join the growing group of net importers in four short years. As a consequence, Mexico will transition from being the number two US supplier to a competitor in roughly one decade.
While these are sobering statistics, an even more unsettling trend emerges from an evaluation of export trends by nation. While the total number of net exporting nations has remained relatively stable since 1996, we have witnessed a drastic decline in the number of net exporters that are still able to increase the amount of oil sold on world markets. In 1996 only one of forty net exporters had reached an export peak (the other 39 were willing and able to increase production to satisfy growing export demand). By 2008 only twelve of thirty-eight had not reached an export peak. Oil exports from the rest were in decline.
When the market for oil gets tight, these pre-peak nations are who the industrial giants call upon to to meet rising domestic demand. The list includes: Iran, the UAE, Kuwait, Iraq, Angola, Libya, Kazakhstan, Qatar, Azerbaijan, Sudan, Columbia, and the Democratic Republic of the Congo. Four of these states are among the weakest states in the developing world. In the Brookings Institution index of weakest states (.pdf warning), the DRC ranks third, Iraq fourth, Sudan sixth, and Angola eleventh.
Figure 3: Total number of net exporters and total number of net exporters not past peak exports. (Calculations based on data from the BP Annual Statistical Energy Review – 2009)
While these data do not suggest that armageddon is just around the corner, trends in domestic production and consumption among the world’s net oil exporters strongly suggest that supply constraints will challenge business as usual. Are you prepared for another fuel price spike? Is your employer? Is your state budget? One thing is certain, oil companies are!
Now, a lot of talk of alternatives and offshore drilling are floating around. If I were a gambling man, I would be anxious to bet that efficiency gains and alternatives will fall far short of the requirements of business as usual. This leaves only one option: voluntary conservation and thoughtful, responsible consumption.