Oil & the Economy Steven Kopits Federal Reserve Bank Managing Director San Francisco, California Douglas-Westwood LLC July 25,

Transcription

1 Oil & the Economy Steven Kopits Federal Reserve Bank Managing Director San Francisco, California Douglas-Westwood LLC July 25, 2

2 Who we are offshore onshore Douglas-Westwood U.K. based consultancy Aberdeen, Canterbury, New York, Singapore Industry Sector Coverage Oil & Gas - Offshore Marine Renewables Power Clients Leading global corporates GE, Baker Hughes, NOV, ABB Investment banks & PE firms GS, JPM, Citi, Barclays, BoA/ML KKR, Blackstone, First Reserve Government agencies UK & Norway offshore wind strategy Economic impact studies power LNG downstream renewables 2

3 Explaining the Past Looking Forward Conclusions 3

4 mbpd From an oil perspective, how did we get here? Oil supply stopped responding in Q4 24 Global economy kept growing By 28, the world economy was missing a quantity equal to the output of Saudi Arabia Today, compared to 24 Q4, we re missing a Saudi Arabia + Iraq Actual (EIA) Expected Based on GDP Growth Observed Oil Supply; and Oil Demand anticipated based on GDP growth Source: EIA. IMF, Douglas-Westwood analysis 3% Global GDP Growth 2% Oil Supply Growth * Demand growth = GDP growth.2% annual efficiency gain 4

5 Oil Prices Brent, July 2 th The lack of oil to support economic growth lead to a prices surges in 28 $4 $2 $ $8 $6 Current Price, dollars/barrel Inflation Adj Price (2 dollars) and now again in 2 $4 $2 Just three years later! (Oil price today above oil shock levels of 73, 79 in real and nominal terms) $ Real and Inflation Adjusted Crude (RAC) Oil Prices Source: EIA. Douglas-Westwood analysis, Monthly data, as of March 2 5

6 Oil Prices and Recession Without incremental supply, oil prices spiked Historically, when crude oil expenditure has reached 4% of GDP, the US has fallen into recession Equals $85-9 oil WTI July 22 nd : $99 Brent July 22 nd : $8 Oil: What Price can America Afford? 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.%.%.% On July, 2 US Recession US Oil Purchase/GDP US Crude Oil Expenditure as a Percent of GDP Source: EIA STEO, Monthly data, through March

7 Millions of Barrels per Day 2 and 6 month m.a. Oil and the Recession Oil prices pressure are typically not resolved by efficiency or conservation not by adding capacity They are solved by brutal recessions 28 like prior oil shocks, except in one respect There was no supply disruption First peak oil recession? mbpd over 4 years US Crude Oil US Expenditure Crude Oil Consumption as a Percent of GDP Source: NBER, EIA EIA US Recession - 2 mbpd over 2 years US Oil Consumption (mbpd)

8 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan- May- Sep- Jan- mbpd, 5 month centered m.avg. Why the need for traumatic adjustment? Oil demand is typically inelastic during times of economic growth Demand is hyper elastic during recession Demand can grow in the face of stiff price increases during an economic recovery So oil consumption is only ceded historically during recessions (Suggests oil is an enabling commodity, like water or air we won t give it up easily because it reduces other activities, too) Inelastic Demand: 25% price increase =.5% decrease in consumption per annum Super Elastic Demand: 65% price decrease = 9.3% decrease in consumption over 8 months Positive Elastic Demand: % price increase = 3% increase in consumption over 22 months Change in OECD Oil Consumption from the Stalling of the US Crude Oil Expenditure Oil Supply in as H2 a Percent 24 of GDP Source: NBER, EIA EIA 8

9 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan- May- Sep- Jan- mbpd, 5 month cma So why a recession now? No supply disruption in 28 No peak oil in accounting terms Just a slow-growing oil supply But the existing oil supply is being reallocated from the OECD countries to the non- OECD countries Demand not supply-- shock. 8. Recession 6. OECD Non-OECD Change in OECD and non-oecd Oil Consumption, from Stalling of Oil Supply in Q4 24 Source: EIA STEO 9

10 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb- Apr- Jun- Aug- Oct- Dec- Feb- mbpd, 5 month centered m. avg. What was the purpose of the Recession? Recession not merely shock and recovery Fundamental vehicle for reallocation of demand from OECD to non-oecd All of the drop in OECD consumption occurred from the first month of the Recession, to the last month of the Recession. Not before, not after. OECD consumers are providing more than 9% of increased consumption in the non-oecd Contribution of oil producers is minimal Change in OECD and non-oecd Oil Consumption from US Crude Oil Beginning Expenditure of Great as a Recession Percent of GDP 2.2 Source: NBER, EIA EIA Recession OECD Non-OECD

11 Credit: ENI What s happening now? June production at 88.5 mbpd up.% over last June But fundamentals analysis shows consumption should be at 9 mbpd, using last June s prices So we re.5 mbpd /year short to achieve price stability Oil supply needs to grow around 2.8% per year it s managing less than half that. The difference is worth $3 / barrel compared to last June.

12 Picture : Rowan Companies Explaining the Past Looking Forward Conclusions 2

13 million barrels per day Millions of barrels per Day Longer Term Outlook: China, China...and Others China as Japan (96-973) China as Korea ( ) China - EIA IEO Onshore oil production Offshore oil production Oil consumption China Unconstrained Demand Source: EIA, Douglas-Westwood Analysis China Crude Oil Production and Constrained Demand Source: EIA, Douglas-Westwood Analysis GDP growth of %; oil demand growth of.5% in 2 8 million light vehicle sales in 2 vs. 3.6 m prior year (2.6 m for US in 2) S curve motorization in one generation Crude oil imports up 27% in January (imports = half of consumption) In 2, China was /3 of total global oil demand growth Prospective unconstrained growth: 5 mbpd by 23 (vs. US 9 mbpd today) On paper, 4 6 mbpd of demand by 23, nearly 2x current demand 3

14 Long-term Supply Outlook Production Capacity Current Production IEA, EIA Douglas-Westwood, Shell Total Uppsala University* * Only material difference between Uppsala and IEA is depletion rates on fields to be discovered and developed to 23 2 Year 23 Range of Global Oil Supply Forecasts 23 All Liquids Source: Various Petroleum liquids supply forecasts from 75 5 mbpd for 23 4

15 Long Term Demand Accommodation The emerging markets will bid away the advanced countries oil It s not peak demand, it s unaffordable oil Assuming mbpd supply by 23, US consumption would be expected at 4 mbpd down /3 from 2 mbpd in mid 27 Rate of long term decrease:.5% per annum, 2.3% on a per capita basis Per capita, still puts US in 23 on par with Japan, Korea today. Global Oil Consumption Source: Douglas-Westwood projections based on EIA data It also provides us a baseline to measure stress in the system 5

16 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan- Jul- Inelasticity, Stress, and Price Increases $4 $2 $ $8 $6 $4 $2 $ US Oil Consumption, Actual and Predicted based on Demand Re-Allocation to non-oecd Source: EIA and Douglas-Westwood Analysis Difference between actual and predicted oil consumption (based on re-allocation of demand to non-oecd) gives us a measure of stress in the system Brent Crude Oil Spot Price, US Dollars Source: Barchart.com Does systemic stress equate to exponential price rise? 6

17 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May- Jan- Sep- May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 And finally, a price outlook $6 China setting oil prices? Appears so. China tolerance limit: $ US tolerance limit: $9 And the gap appears to grow over time. $4 $2 $ $8 $6 $4 $2 $ Brent Spot - Historical Brent Crude Futures China - Max Theoretical US Max Theoretical Still early days for the model. Carrying Capacity of the US and Chinese Economies in terms of Brent Crude Prices; Brent Crude Spot Prices and Futures, Jan. 23-Dec. 25 Source: EIA, IMF, Barchart.com, Douglas-Westwood Analysis 7

18 Image: Shell Explaining the Past Looking Forward Conclusions 8

19 Conclusions Oil Gas the post-recession world 28 was an oil shock, not just a financial crisis Shock was demand, not supply, driven Result of need to re-allocate consumption from OECD to non-oecd Reductions in oil consumption are ordinarily achieved by recessions that s the corollary of inelastic demand Speculation is also then a corollary of inelastic demand price must be above sustainable price to induce traumatic reduction in consumption We may be able to measure the stress in the system There may be quantifiable linkage between systemic stress and the oil price ie, it s not about rogue traders China s carrying capacity appears to determine the oil price China s carrying capacity may continue to increase against the US We appear to be in or near an oil shock now phase change in May Oil shock cycles are likely to be short: 3-4 years trough-to-trough The oil (petroleum liquids) supply has not peaked but shows all the hallmarks. If it peaks, we could get shocks without needing re-allocation Buckle your seat belts, we re in for a bumpy ride. 9

20 Thank You. Steven Kopits Managing Director New York, NY This presentation can be downloaded from 2