Proceedings of the
Second International Energy 2030 Conference,
November 4-5, 2008, Abu Dhabi, U.A.E.
“Where’s my Surplus?” New Consumer-driven Realities in Oil Markets
Dr. Dalton Garis
The Petroleum Institute, UAE
Abstract
This presentation (and paper) argues that crude oil prices are reflecting a structural shift in world
supply-demand relationships, and that the current elevated prices are not the result of just another oil price
boom-bust cycle, similar to what occurred during the 1970s-1980s period. A misreading of this reality has
caused a deliberately slow response to elevated crude prices on the part of the oil majors and the national
oil companies, thus, exacerbating price increases from perceived and real inadequate capacity increases
upstream, midstream and downstream. Coincident to this is an increase in world crude demand, especially
from India, and from China, which has become the second largest oil consumer after the United States,
displacing Japan to third place in 2005.
The combination of a slowed capacity increase from producers and accelerated world demand increases
will lead to elevated crude price levels for the rest of the decade. There is just too much delivery
infrastructure that has not been maintained for too many years, due to the long period just ended in 2003 of
oil prices too low to attract needed capital. With the increased demand growth, 60% of which is coming
from transitional economies in the Asia sphere, there is the long-anticipated emergence of the sub-Saharan
economies with a population of 1.5 billion, which will plug in to the world energy grid in the next decade.
From where will the energy for there persons be supplied?
Energy consumption is estimated to be income-elastic in transitional and developing economies such as
China’s, and perhaps unitary- or even inelastic in mature economies, such as Germany’s or Japan’s. This
means that for a 10% increase in Chinese GDP there is an expected greater than 10% increase in energy
consumption and use. But China’s GDP growth has been over 14% annualized for 2006, consistently
greater than the best estimates. This portends even greater oil demand from China. Today, China imports
6.8 mbd of the world’s crude. But at an annualized growth rate of even 9%--far less than actual—China
will double its oil consumption in just 7 years. Meanwhile, as the accompanying graphs and figures show,
the world oil balance has gone away, from over 6 mbd. of excess oil production capacity, to less than 1
mbd.
Thus, the danger to the industry is not the typical scenario of over-investment, leading to a general
price collapse and subsequent financial stress for investors, and national and international oil companies;
but rather, under-investment, which could accelerate price rises and economic dislocations.
