It is all about consumption and depletion.
The chart below shows that discoveries of oil are declining while production of oil is stagnating.
This means that reserves are being depleted and not replaced by new finds.
Yes, there have been several announcements over the past few years about big oil discoveries.
But they inevitably have turned out to be less than originally thought (Black Sea), harder to get at than you can imagine (Deep Water oil) or in need of expensive processing (Shale Oil, Heavy Oil).
The IEA, International Energy Agency, has estimated that the World needs to find the equivalent of 6 Saudi Arabias to fill the widening gap between oil production and oil consumption over the next 20 years. The chart above shows only 1 Saudi Arabia has been found in the past 70 years, and the last “Giant Oilfield” was found about 30 years ago. No Giants since then.
The Consumption vs Production chart shows that not only is the World consuming more than it is producing, the gap is widening. The gap is being filled by countries drawing down their oil stocks and reducing their emergency stores.
The long term trend of oil consumption growing faster than production will not be impacted by short term moves in the price of oil. The decline in consumption in 2009 had more to do with the Global recession than the 2008 rise in price.
An important observation is that oil production has barely budged in the past 7 years. Since 2005, oil production is up 0.75% while consumption is up 3.87%. Has oil production hit its ceiling?
Scarier still are the projections of Oil Consumption by BP. The Oil Consumption chart below compares North America and Europe with Asia. As you can clearly see, N. America and Europe are expected to see flat to down consumption, while Asia’s consumption is exploding.
This should tell equity investors where to look for growth. Oil consumption tends to follow GDP growth. If this holds true, then N. America and Europe are dead money and Asia is the place to be.
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