Friday, February 15, 2008

North America Oil Import Crisis 101

As my regular readers know, I believe that a structural supply/demand imbalance will have a significant impact on the prices of crude oil, natural gas, agricultural commodities, precious metals, the U.S. Dollar, and other commodities linked to the energy sector over the next several years.

The U.S. imports nearly 60% of the oil and a significant portion of the natural gas it consumes, and imports 25% - 30% (Source U.S. Department of Energy) of the world’s exported oil with less than 4.6 % (Source U.S. CIA Factbook) of the world’s population. I firmly believe that the top oil exporting nations will have less oil available to export as a result of higher domestic consumption and flat or declining production. With less imported oil available to the U.S. the supply/demand balance will be brought into equilibrium by significantly higher prices for crude oil. In the case of North American Natural Gas, the future supply picture is quite bleak, and it appears that North American production of natural gas has peaked. There is little possibility that U.S. imports of liquefied natural gas (“LNG”) will be of sufficient volume during the next 10 years to overcome the deficit in North American production.

Herewith are the numbers to support my contention:

The top 10 oil importing nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of barrels per day ("bpd") imports:

Rank Country Net Imports

1. United States 12,220,000
2. Japan 5,097,000
3. China 3,438,000
4. Germany 2,483,000
5. South Korea 2,150,000
6. France 1,893,000
7. India 1,687,000
8. Italy 1,558,000
9. Spain 1,555,000
10. Taiwan 942,000

Demand from China, India, and the balance of Asia, as well as the oil rich Middle East will continue to draw imports from the industrialized nations, in my opinion.

The top 10 oil exporting nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of exports:

Rank Country Net Exports 2006 (Barrels of oil per day)

1. Saudi Arabia 8,651,000
2. Russia 6,565,000
3. Norway 2,542,000
4. Iran 2,542,000
5. U.A.E 2,515,000
6. Venezuela 2,203,000
7. Kuwait 2,150,000
8. Nigeria 2,146,000
9. Algeria 1,847,000
10. Mexico 1,676,000

(All data from the U.S. Department of Energy, Energy Information Administration (“EIA”)

The oil importing nations can only import oil that the oil exporting nations export, and the EIA’s export data appears to support my (and many other folks) contention that rising domestic consumption coupled with declining production in many of the exporting nations will lead to declining aggregate oil exports – and declining oil availability for the importing nations.

Domestic consumption in 4 of the 5 top exporters (the exception being low population Norway, where production of Crude & Condensate (“C & C”) is in steep decline and exports have declined from 3,145,000 barrels per day in 2000 to 2,542,000 in 2006) is growing vigorously, while production appears to be plateauing or in outright decline, leaving less and less available for export, in my humble opinion. Venezuela and Mexico’s production are in steep decline, and Mexico may become a net oil importer within 5 to 10 years. The aggregate world production of C & C has declined from a peak of 74,298,000 barrels per day (“bpd”) in May 2005 to 72,512,000 bpd in August 2007, a decline of 1,756,000 bpd from peak month to most recent month. The peak year for world oil production was 2005 with world C & C production averaging 73,807,000. For 2007, average daily world C & C production is down to (click 1.1d) 973,093,000 barrels per day. Since 1950, and with the exception of the 1970’s oil embargos, world C & C supply has steadily grown by between 2% and 10% percent per year. Over the past 2 years, it has fallen by just over 2% from the peak month of May 2005. During this time prices have risen dramatically and supply has been unable to maintain its historic growth.

Demand appears to be inelastic, as since 1999, C & C prices have risen nearly 900%
(from trough to peak) and demand has increased during this time by approximately 15%.

This is not to imply that the world is “running out” of oil in the near term, but that the world will be unable to increase the amount of C & C it produces for a time, which will then be followed by a period in which C & C production will go into terminal decline. An environment of constrained oil and natural gas supply will benefit certain commodities, industries, and companies while placing other industries and companies in an extremely challenging environment. Understanding this issue might be the difference between losing your life savings to either market disruptions or hyper-inflation (or for that matter deflation, though I think in the U.S. case it would be more hyper inflation of commodities and chronic deflation in all sectors having to do with housing).

I firmly believe that rising oil prices will have multiple secondary effects including, but not limited to:

A concomitant rise in prices of all other fuel sources including coal, uranium, and Natural Gas, and;
An increase in prices of certain agricultural commodities which rely on fertilizers and pesticides, and;
A decrease in prices of certain metals which are used in infrastructure, and;
An increase in prices of certain metals used in energy related infrastructure, and;
Strengthening of the currencies of certain oil exporters versus certain oil importers.
The collapse of the U.S. Dollar.

The answer to the Falling value of the U.S. Dollar is not the other major currencies. ALL CURRENCIES CAN FALL IN VALUE TOGETHER. How? AGAINST THE THINGS THAT THEY CAN BUY. Oil, Natural Gas, Corn, Wheat, Soy Beans, Silver, Gold, Palladium, etc... will rise in price versus ALL currencies if Oil production goes into decline.

"When you find yourself in a hole, stop digging." - Anonymous

Leveraging up to expand your business will lead to disaster in this environment, as will holding U.S. dollars as a store of value (and suburban real estate).

I am of the opinion that although the average American investor is quite literate, unfortunately they are quite innumerate - so much so that the average American investor is not even capable of defining the term. With that in mind let's go to the online encyclopedia,, for a definition:

Innumerate: marked by an ignorance of mathematics and the scientific approach

If you are an investor, educate yourself and take action. If you are innumerate, don't sweat it. You can become numerate with a little effort and a high speed connection - and rather than trusting me, another Wall Street huckster with an agenda, click the links, read my sources, and come to YOUR OWN conclusions. But like it or not, the above numbers are as hard as rock. And there are no pipelines coming into earth from outer space, so we are going to have to live with the fact that there will be less oil available for import in the very near future.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

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