Time for the EIA prediction for 2006

The December EIA Short-term Energy Outlook reports that total US energy demand has remained flat this year, but is expected to grow by some 2% next year.  Which is a cue to an observation.  In the discussion on demand destruction generated by increased fuel prices, the usual assumption has been that the poorer countries are the first that will see the impact.  But, as the recently changing situation in regard to US gas demand is starting to show, demand destruction will also happen here.  It is beginning with industries that depend on a cheap source of natural gas  for their feed stock.  To a degree it is not an absolute destruction yet. One imagines that the fertilizer shortage, generated as plants close in the US, will be met by new plants, built in countries that still have an abundance of natural gas.  The industries that rely on cheap feedstocks for plastic manufacture may well be next.  And as these industries leave, so the demand (and unfortunately also the employment) will decline with it. The EIA report anticipates that this drop in demand will be 7.5% this year, though they expect 4.6% of this to come back next year.

The EIA report is now predicting that by March some 0.66 bcf of GOMEX natural gas (6.5% of production) and 297,000 bd of GOMEX crude oil (19% of production) will still be shut-in relative to  the pre-hurricane status.  All three of refineries that are still down are anticipated to be on line at the end of February, bringing back some 804,000 bd of production, just in time for the end of the heating season.

The report also discusses the increased costs of home heating, though it does not note the developing shortage of pellets.for pellet stoves.  I mentioned that concern to a friend of mine in biofuels, and he noted that as pellet prices head toward $300 a ton, it would be cheaper to go out and buy corn, which would work just as well. (If corn is at $2.00 per bushel, and a bushel weighs 56 lb then it would cost around $72 per ton). Do we want to go there?

World oil demand is anticipated to grow some 1.7 mbd, higher than this year's projected 1.3 mbd increment, with US leadership of this growth.  For those wishing to place bets on accuracy they anticipate an absolute growth (ie. accounting for declines) in spare capacity (i.e. over demand) of around 1 mbd.  Which, when the increase in demand is factored in, means that they are expecting supply to increase by around 2.7 mbd. 0.8 mbd of this is projected to come from outside OPEC - 400 kbd from the Caspian, 450 kbd from the West (including Canada and Brazil) and 150 kbd from West Africa.  The balance of the increase I assume is expected to come from OPEC, i.e. around 1.9 mbd. The average price for a barrel next year is expected to be around $63.

In regard to natural gas supply the US will increase by almost 5% next year, with imports of LNG rising to around 1,000 bcf.  Of course that will depend to an extent on how many terminals will be available.

There are lots of "if's" in this prediction.  We'll just have to wait and see how it works out.

I don't think there is anything inherently flakey about the production numbers. They show everything moving along like normal, just with a higher average price of oil than last year. That is the only questionable number. Where does that come from? It basically says demand will move like it has been. So will production. Therefore P/Q remains the same, so price stays basically where it is. We KNOW that the price staying where it is is itself only a 1-in-3 proposition. It will probably go up or down. How many times in last 20 years has price stayed basically even year over year?

Canada, Nigeria, Kazakhstan. Fine. But what about other non-OPEC, top-25 producers?

Russia, Mexico, China, Brazil, Angola, Malaysia, India ?

I know we've discussed these individual situations here at length, what does the EIA have to say about them?

I know Deffeyes predicts the peak now. Others predict 2007+
Do I get points for picking 2006?

Last year I was reading analysts who were confident that oil would fall to $30 or even $20 a barrel. So I've learned to take all these forecasts with a grain of salt.

Heck, Goldman Sachs envisioned a spike to over $100 a barrel.

Nobody knows ...

Given al-Queda have just issued a mandate for direct attacks on oil infrastructure in Muslim coutries the balance of probabilities must be on the upside. Previously they took the view that these facilities should not be targeted, then they changed tack and made in acceptable, now they are actively promoting the idea...

I think that al-Queda has finaly realised the easiest way to hurt their enemies... Bombing and killing in western cities only builds their resolve wereas turning off their energy supply or even just stepping on the pipe gently will cripple them...

Add to that the already tight supply, the growing threat of continued exceptional hurricane strokes on the GoM and the seemingly unstoppable demand growth. Can we realy expect anything than the continuation of the multi-year trend in prices...?

If they didn't know this before then Katrina told them exactly how to cripple the U.S.
I'd like to see a definition of "demand destruction". AFAIK this is not a standard economics term. Is it just another word for "demand reduction", as we might read in any economic textbook, something like, "higher prices will cause supply increase and demand reduction"?

Or is there some implication that "demand destruction" is more permanent than mere "demand reduction"? That we are actively "destroying" whatever the sources of demand were, so that demand would not come back even if prices came back down?

Most of the hits I see on this term come from the Peak Oil community so it seems to be specific to this group. What does it mean?

Here's well known peak-oilers the IEA using the term.. Here's an energy fund manager using it. I suspect it's an oil industry term, and comes from the experience of the late seventies and early eighties when high prices did indeed cause changes that caused long-lasting reductions in demand. Because so much oil-using infrastructure is long lived (cars, and the offices, houses, and businesses they move between), changes take a significant time to make, but once made, reduce demand for a very long time.
Stuart, I know this has been discussed before, but with CERA again saying no peak till at least 2020:


We are thinking it may have already passed or may come next year. I still struggle with how people can persistently reach such different conclusions (although I'm used to it). I know it's about estimates for decline rates more than about new production. You have seen more of the the CERA report than I have. Is it possible to identify & quantify specifically the discrepancies between our assumptions and CERA's in a way that they can be more systematically compared and challenged?  What exactly do they say about decline rates? Do you know? Thanks. I understand if you don't have time to address this.

I don't know with full confidence. I do not have the full report, and people who I've talked to who do say it doesn't give full detail (eg doesn't give the full list of fields). So I have no way to assess it. The 16mb they talk about by 2010 is consistent with Chris Sebrowski's number, which Rembrandt and I think is a little on the low side. However, it all depends on what one assumes about the FIP decline rate. CERA appears to account for FIP decline, but there's something extremely fishy about their specific graphs. Eg this one, were fields under assessment (FUA) start contributing to production in 2005.

Thanks for the response. Very interesting graphic. Suggests an additional 500,000 barrels per day by 2007 from fields uncharacterized and not even yet under development? Seems quite impossible given lengthy time lines for developing fields, even if the oil is there (which is apparently uncertain).

With enough of this fudge spread around, I can see how they claim no problem. I just wish people in the public debates had time to actually discuss and challenge these assumptions, and that the journals would be more critical in their reporting rather then parroting their favorite pundits.

Thanks again.

I first heard "demand destruction" used on Econbrowser, in response to PO statements that Demand exceeded Supply.
Superficially the EIA outlook seems reasonable, as one might expect. No doubt their outlooks in December 2004 and 2003 looked much the same. Has anyone got links to or copies of previous EIA outlooks to compare? I scratched around on the EIA site and failed to find. I'm pretty sure they didn't predict a surplus supply of only 1 mbpd or a price increase of over 30% ;)

With decline setting in to most if not all the mega FIPs there is plenty of scope for supply to turn out below EIA forecasts, I'd bet it will, when has it not? But I'd also bet that demand may grow less than expected, too, since China seems to be showing first signs of slowdown and the US is on the brink of slowdown lead by consumer demand and housing.

Things will be tight and any supply shocks will yank prices up; anything major, like significant silliness betwixt US and Iran, would probably spike the price over $100, briefly at least.

I expect an average price for WTI of $71 for 2006. Last December when the price was $42 I predicted spikes of $60 in April 2005 and $75 in Oct 2005 - only a little high for both and 2 months late for second. Interestingly the average price for the last 2 years has been very close to their prior year's highest spike, I expect that to continue. Now we are about at the turn of the oil age it may be a useful hypothesis - Agric's Law: "The average US$ price of a barrel of WTI oil for a calendar year will be determined by and within 5% of the prior calendar year's highest end of day price."

In the short term I guess a price of $66 at Dec 31st 2005 which will be 50% higher than it was exactly one year before.

Is there any chance that OPEC can increase production by 1.9 mbd?  Who has the spare capacity?
The price of corn is so low because supply is so huge. Burning corn is a more efficient use of its energy than conversion to ethanol. Creating an increased demand for our crops is a national goal and as stated earlier farmers are reluctant to learning to grow different crops. Rural economies are depressed with many marginal farmers just giving up and moving to town. There are millions of acres of unused farm land in America that could be turned into energy farms if there were an adequate stable price for what is grown.
Kuwaits' Burgan field decline has not been taken into account on the chart, to show a drop, i don't think. Unless other fields are increasing. Then there is PEMEX announcing their decline. I'm not sure it was taken into account either. But thats OK, As someone mentioned before, take the chart projections with a  grain of salt. Price projections seem to be more like averages, rather than the highest price. So, we may be in for a ride.

At least we don't have Peak Alcohol!
Now that would be a crisis!