By Joe Petrowski
The question often comes up: What is a “fair” or equilibrium price for crude? Putting aside what a producer “needs” to either remain solvent, balance the current accounts or government budget the best way to approach the question is to look at old fashion supply and demand on a global basis.
First Crude Oil Demand
- World GDP $80 trillion
- Energy intensity at 17% $14 trillion
- Petroleum intensity at 15% $2.1 trillion
- Annual consumption of crude 35 billion barrels
- Crude price at equilibrium $60/barrel
These numbers approach petroleum from the demand side and are a good gauge of sensitivity to the variables of petroleum demand:
1) World GDP–US, Asia and EEC, primarily
2) Energy Intensity– At 17% world energy intensity is slightly less than US at 19% because of less energy intensive manufacturing and less infrastructure (roads, power grids, computer networks, etc.)
3) Petroleum Intensity–This is driven by transport fuel which the United States is predominant, but China is now accelerating and is the biggest vehicle market in the world. Also, others fuels like coal still are a big slice of world Btu demand, but this will change as other countries access markets for imported natural gas and liquids and switch to more environmentally accepted fuels.
4) Annual consumption of crude– This is currently 95 million barrels per day or about 35 Billion barrels per year, so a $60 price per barrel neither stimulates increased demand nor rations it.
Long term the crude price is certainly impacted by GDP growth, energy intensity or efficiency and the utility and use of alternate energy including coal, natural gas, hydro, wind and bio. The United States remains well heated, cooled and illuminated and in love with private transport. The rest of the world is playing catch-up.
Now Crude Oil Supply
The ability and willingness to produce is obviously different for each country depending upon:
a) Type of formation (shale, deep water, existing versus new field etc.)
b) Capital spending
d) Politics including taxes, governance and contract norms
A doubling of world GDP with 20% energy intensity and 20% petroleum intensity would bring world crude demand to only 150 million bbl/d or 54 billion barrels annually at $100/barrel, and we could easily satisfy that if necessary as the following table illustrates:
So from both a supply and demand perspective, between $50 and $70 dollars is a current great equilibrium price for a barrel of oil. Below $50 was never sustainable nor was price in excess of $80. If world GDP picks up certainly price will strengthen, but there is significant elasticity in supply and this does not take into account changes in technology that makes the finding and extraction of crude more efficient as well as the anticipated revolution in hydrogen, batteries and natural gas.
What are the policy implications of above?
1) Keep U.S. production strong (while Nigeria or Indonesia make headlines at times, it is still Saudi Arabia, Iran, Russia and North America that move the needle).
2) We need infrastructure in oil and natural gas to simply move from production to consumption. The more we can export natural gas to other countries the better the world environment and the more pressure on oil prices.
3) Power is the growth market in the United States and the world.
4) China will be the transport fuel center of the world surpassing the United States. (Will they have Drive- Ins, and songs about a GTO?)
5) Markets work and prices are elastic in both directions. WE are not now, nor ever will run out of oil. We have obviously run out of good candidates and leaders, but nobody laments the reaching of “peak intelligence.” We are in a transition where petroleum is taking less of a slice in world Btu consumption.
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008 he was named CEO of the now combined Gulf Oil and Cumberland Farms whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is now managing director of Mercantor Partners, a private equity firm investing in convenience and energy distribution and Chairman of the Gulf board.