Saturday, August 28, 2010

Crude Oil Analysts' Horrible Track Record Shows Why Prices Could Super Spike Thanks To China

Last week we highlighted a chart from the Council on Foreign Relations, which showed China's potential to become a truly monstrous oil consumer, should it approach the oil consumption-per-capita levels of Taiwan, Korea, or heaven forbid, the U.S.. Here's a quick refresher of the chart, for those who don't want to check the previous post:

China could rock oil. Basically, China has the potential to truly rock the oil market, just as it has already done for other commodities such as iron ore, given that even at its currently low level of oil consumption per capita, it is the second-largest oil consuming nation in the world.
If so, then why aren't more people talking about this? Is it just a scare story?

So far the consensus view is that China won't fulfill the scare story shown in the chart above, since the Chinese government is already working to restrain oil consumption growth in the future, via initiatives such as natural gas powered transportation and research into mass market electric cars. The consensus oil view is thus that China's oil demand will rise for the next few decades, but not by as much as the CFR shock chart above would suggest. We even received some push back from an experienced oil analyst for discussing the topic.

Many professionals believe it won't happen. Here's a slightly dated China oil forecast we pulled from the IEA, which shows a rather tame growth trend for Chinese oil consumption. While the chart below is from 2007, the latest China oil consumption forecast is about 9 million barrels per day by the end of 2010, which is similar to what's shown below.

Problem is... professional oil demand forecasts are horribly inaccurate. Thing is, the IEA has been hiking their Chinese demand forecasts for years as shown below. Even as recently as 2004, the IEA expected that China's 2015 oil consumption would be 9 million barrels per day... which is about what today, in 2010, China's consumption is expected to be by the end of this year. Oops. Forecasts just keep rising:

Moral of the story -- commodity price spikes happen because nobody expects them to. Just because many pros think China will diversify its fuel sources into electricity and natural gas, thus keeping oil consumption in check, doesn't mean it will happen. Many oil market pros could easily be wrong, as they've been in the past, and Chinese demand could continue to be revised upwards, just as the CFR chart we showed last week suggests is a possibility.
Sharp spikes in prices happen, after all, since few expect them to happen, and reality keeps bewildering expectations. Does this mean oil prices are guaranteed to super-spike? Of course not. But don't discount the simple historical analysis shown by the CFR chart above, China could easily fail in its quest to reduce its oil dependence, and send oil prices through the stratosphere as a result.

For more check out Vincent Fernando at Business Insider .Com


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