Oil consumption China vs The United States

BP’s annual energy statistics are a great source of information for those trading energy markets, particularly oil. The recent 2012 annual review shows (despite all the negative reporting around supply constraints in 2011) loss of supplies were more than offset by large increases in production among Middle Eastern OPEC members, leading to a record year of production, for example as in Saudi Arabia. The UAE and Qatar also reached similar milestones. All three of these producers lie in the Strait of Hormuz which is known to be one of the most volatile waterways for seaborne oil shipments.

With Brent crude prices recently bouncing off their June lows this year towards US$115 per barrel, we thought it useful to cast an eye over the latest set of BP global numbers and address some myths.

Fossil fuels still dominate energy consumption representing around 87% of global market share. Renewable is rising but still accounts for less than 2% of total energy consumption globally. Oil has lost market share for the 12^th consecutive year but still remains the leading fuel in terms of consumption.  Despite efforts by governments globally to curtail emissions, coal remains the fastest growing fossil fuel. The most striking statistics are those around China – it accounts for 71% of global energy consumption growth. This growth alone accounts for around 500,000 barrels of oil per day. What happens in China is important to oil markets, but China is not the only piece of the puzzle.

While China is the fastest growing consumer of oil, the statistics still show the United States is the single largest consumer of oil, representing around 18.8m barrels of oil per day. This compares with China at around 9.8m barrels per day. Sure, China is important over the medium term but the United States alone currently represents around 21.5% of total global consumption. China, Japan and India combined still consume less oil than the United States. So while China is important to the overall growth conversation, demand for crude still remains very much leveraged as to what happens in the world’s largest economy – the United States.

The last thing the world’s largest buyer of oil needs in an election year is an elevation in price, particularly as the economy works through its current issues. We think key producers will seek to limit further prices increase by talking up supply should Brent continue to rise. Saudi Arabia alone managed to grow oil production in 2011 by 12.7% – already the largest single producer of oil now pumping out 11.2m barrels of oil per day. The United Arab Emirates is quickly catching up to Iran, now producing 3.3m barrels per day versus 4.3m respectively.  Russia’s growth has flatlined – a topic we plan to explore in the coming months.

There are the odd political tensions that can frighten markets, but 2011 showed despite all the problems in the Middle East and aggressive sanctions imposed by the US on Iran, the region still managed to book 9.3% growth in oil production. This was the fastest growing region for oil production globally. Production in Europe in comparison fell by 1.8%. The threat of closing the Strait of Hurmiz off the coast of Iran will only cripple Iran’s economy even further at time when it has managed to find ways around current strict sanctions.

Therefore, the short term vocal response from these key Middle Eastern suppliers is more important to monitor when prices rise too rapidly, rather than fears around supply constraints. The Middle Eastern suppliers all know very well that an unsustainably high oil price is not in the best interest of their customer base, when they have the ability to ramp up supply and pull back prices. Brent could trend back below US$110 per barrel in the coming weeks, should this pan out. The next OPEC meeting is scheduled for 12 December.