I have to confess, I am plagued by an affliction. The more I try and focus on the high-brow stuff, the more I am preoccupied by thoughts of the inane. Hence as I try and get my head around supply and demand in the oil market, my mind drifts off to ‘Willy Wonka and the Chocolate Factory’ to try and draw comparisons.
Previously here on the burrito we have looked at energy through the lens of everything from super-heroes to rock bands to cartoons; and today we are going to join the dots betwixt oompa loompas and energyland™.
And it is with oompa loompas that we begin this tale, given this is what kick-started this tangent. The little fellas are the most obvious analogy to me of marginal global oil production. Just as the oompa loompas play a minor but highly significant role for Willie Wonka in his chocolate factory, so do some of the smaller oil producers in the global oil market. While the presence of such bit-part players such as Yemen, South Sudan, and Syria is taken for granted, the cliff-like fall in their oil production - as we have seen in recent times – has markedly tightened the global market.
The individual loss of production from each of these countries is not a huge deal in isolation, but the aggregation of these losses simultaneously due to political unrest – as we have seen - has meant that approximately 800,000 barrels a day have been taken offline. And this has occurred when the market is already relatively tight, meaning the loss of these barrels has been a stealth bullish influence all year.
If the bit-part players are oompa loompas, that must make Willy Wonka the leader of global oil demand….the US. Further, just as the whole premise of the movie is based on the fact that Willy Wonka has reached his prime and is looking for a successor, the US is in a similar predicament.
US oil demand peaked in the summer of 2008, as illustrated by total products supplied below. It was then taken down a peg or ten by the ramifications of high oil prices (which also peaked in the summer of 2008) and the subsequent ‘great recession’. And although demand started to find a floor in the summer of 2009, it still appears to be flat on the canvas.
This could be attributable to a combination of factors, from increasing fuel efficiency of cars to online shopping to consistently high gas prices, but the reality is that high unemployment and a lackluster economy means that driving is more of a luxury than it once was.
So if Willy Wonka has passed his prime, the logical conclusion is that the heir to the throne, Charlie Bucket, is China. For China is set to surpass the US sometime mid-next decade to become the largest global consumer of oil. That said, just like Charlie Bucket must have, the largest emerging market is experiencing some growing pains, as its economy is reined in by slowing demand for its goods from Europe and the US, as well as the ever-present battle to encourage economic growth while quelling inflation.
Nonetheless, both its economy and its oil demand maintain their upward trajectory. The below graphic is from an article from yesterday’s Wall Street Journal, which not only highlights the insatiable cross-commodity appetite that China has, but also highlights how small the energy share is compared to other commodities. The key takeaway: room to grow.
I could go on with the analogies, but will call it a day for now. There are a number of things to take from this post – that every drop of oil counts, from every corner of the world. That the US is still a huge consumer of oil, but that is being curbed. And that China is set to gain the keys to the chocolate factory. Based on this evidence, I’m not sure that if you were wise you would listen to me. Thanks for playing!