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“The 5-mnute ENERGY Blog: Post 8: WORLD OIL DEMAND AND GASOLINE PRICES” by Tim Dunn

Thursday, July 5, 2012  |  posted by Hugh Hewitt

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The latest in a series of posts on energy and America’s future from Tim Dunn, CEO of CrownQuest Operating and a board member of the Texas Public Policy Foundation. Earlier posts can be found here.


The 5-minute ENERGY Blog

POST 8: WORLD OIL DEMAND AND GASOLINE PRICES

Gasoline prices are higher than they should be because of US Federal deficit spending and regulation. I hope I have made that argument persuasively in prior posts.

But supply demand realities are also a definite part of the picture.

Until just a few years ago the price of oil was determined primarily by supply. Demand grew predictably, and there was almost always excess supply. The key question was always “Who will cut back their production to balance the market?” The answer until the early 1970’s was always “The Texas Railroad Commission”, the government agency that regulates oil and gas in Texas. Each month the agency would set the “allowable” which limited how much oil operators could produce. In this way the Commission kept prices low and predictable for many years.

When Texas production peaked in the early 1970’s but demand kept growing, Texas producers were no longer able to balance the market, and the role was taken up by Saudi Arabia (ostensibly OPEC, but no country but Saudi Arabia was consistently willing to curtail production.) For example, Saudi drove the price to below $10/barrel in 1986.

Then just a few years ago the equation flipped, and now oil prices appear to be primarily determined by the demand side, resulting in higher prices and more price volatility. This has taken place for two main reasons. First, as pointed out in Post 4, easy to access oil has become rarer. But the other main driver is the increased oil demand caused by industrialization of the two most populous countries, China and India.

When countries industrialize, they do a lot more work, and work takes energy. Since oil is such an ideal fuel for machines, especially for transportation, oil demand increases. And the more people a country has, the more work it can do.

Here is what the history of oil use looks like for the US on a per capita, or per person basis.

The oil use is in barrels per person per year. So around the turn of the twentieth century oil use hit one barrel per person per year and quickly rose to about fifteen barrels per person per year before the rate of increase began to slow some. It peaked at 30 barrels per person per year.


We would expect something like this curve for any industrializing nation, and in fact we see the same sort of curve for other countries, except they flatten out at a lower per person usage than the US.

China and India are just beginning their rise. China is approaching three barrels per day per person and India has just reached one. We are near twenty. Brazil is around four. It is sobering to realize that three barrels per day per person in China requires the same gross volume of oil as twelve barrels per day in the US because China has four times the population. Since India also has a billion people, its industrialization also has dramatic potential to impact oil demand.

I have captured this in a brief chart. One pint, just one eighth of a gallon increase in Chinese demand requires an additional four million barrels per day of worldwide oil demand. And China currently only uses a tenth per person what we use. So a one pint increase seems highly likely.

It is a great thing for humanity for a family in India to graduate from a horse drawn cart to a motor powered scooter. Multiply that times hundreds of millions it makes an impressive impact on demand.

So perhaps next time you stop at the gas pump, instead of grousing because the price is higher, stop and be thankful that part of the reason the price is higher is because life is improving for millions in the world who are not fortunate to live in our market-based country. Their countries are not based on self-governance, and the amazing, wonderful benefits of the miracle fuel, oil are just now making it to the average person.

Some would say this means America must decline so other countries can share. This is correct if America adopts a central planning mentality for our economy; central planners allocate, they don’t innovate and invest in new supplies. The correct perspective is that it is our job as Americans to do the hard work to perpetuate our market-based system of self-governance and respond to higher prices with more innovation. The rest of the world is depending on us.

We have blessed them before, we are blessing them now and it is our privilege to bless them again.

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