Thursday, February 24, 2005

Critical uncertainties in oil consumption forecasts?

How certain is the oil consumption forecasts for 2010 and beyond? After being appointed to the issue by an old copy of the February 23, 2004 issue of Fortune Magazine and it's article Can China Keep The Lights On? I searched through a number of forecasts from a number of different analysis institutes and government agencies. As usual the differencies where few and the forecasts could with small adjustments be carbon copies of each other. None of them seemed to take notice of the fact one analyst of Bear Stearn explained to the writer of the Fortune article: In some cases energy consumption growth is far from linear but follows an S-curve pattern. When the average income in a region suddenly exceeds $1000 dollar per capita and year the energy consumption accelerates exponentially for some time depending on the number of people and other available resources until it flattens out. This reasonates well with my knowledge from the years in the automotive industry. Mobility consumption follows the same S-curve pattern and has the inflection point at about the same average income.

If the analyst from Bear Stearn is right the oil consumption in China 2010 could be 13 million barrels a day rather than 8 million barrels a day. Adding up the numbers and assuming that only China will be having this knee effect gives that China would consume about 14% of the the world's oil production and not 9% as most forecasts tell. This also means that the global oil consumptions forecast numbers for 2010 will increase from 89 million barrels a day to 94 million barrels a day.

One of the major problems when talking about energy consumption and production in China is that they don't have a energy department in the government. The official numbers are therefore probably even more uncertain than usual. But what is probably worse is that the lack of energy department in the Chinese Government results in a much more slow perception and consequentially more slow and unfocused reactions when it comes to energy issues.

There are actually two uncertainties related to this issue. One is the uncertainty about China's real oil consumption increase until 2010 and beyond. The other uncertainty is about the perceptions of all the actor organizations and governments who have a stake in the issue. Since investing in oil production capacity is a rather long term investment issue, the risk are that a number of them will plan their investments according to the current forecasts. The result of that will probably result in even more bumpy years ahead when it comes to oil price. Which is the worst case you could think of? $100 USD per barrel? $200 USD per barrel? $500 USD per barrel? What will the consequences be for national security and international relations if the consumption forecasts will be severely miscalculated until 2010?

Most people are focusing on the consequences of Scenario A, but what about the others? Today I read Carl Bildt's blog about what is happening with the oil industry in Russia. If the oil production in Russia is in such bad shape the consequences of these scenarios may well be much worse.