213 comments on DrumBeat: January 31, 2008
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213 comments on DrumBeat: January 31, 2008
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ELM (Export Land Model) is NOT just a theory, it is happening now - not good news for people who have to import a lot of oil.
The stunning number was in the story:
Note that they appear to be talking about crude oil (up 15.3%), not total liquids, but I suspect that total liquids consumption was probably up from +10%/year to +15%/year. If memory serves, I got some grief last year when I used a +10%/year estimate for Saudi Total Liquids consumption. I did have an advantage. I was basing the estimate on a communication from a well placed "Non-Saudi source in Saudi Arabia."
In any case, it's a virtually certainty that Saudi Arabia is going to show an accelerating net export decline from 2006 to 2007. We shall see what happens in 2008.
Things are not starting out well for "Import Land."
Russian crude oil exports are reportedly at a two year low, while Russia is on track to become, within two years, the #1 car market in Europe.
Also, note the number of countries adding and/or increasing duties on exported crude and products.
http://ieeexplore.ieee.org/iel5/11204/36065/01708907.pdf
My September, 2007 estimate for 2007 Saudi net exports (I assumed a fourth quarter increase in production):
The Saudi's are in a bind. If they consume too much their export revenues will fall, causing economic crisis at home. They will have to curb domestic consumption.
"They will have to curb domestic consumption."
UK rate of increase in consumption: +0.2%/year; most recent peak to zero net exports in 7 years
ELM rate of increase in consumption: +2.5%/year; most recent peak to zero net exports in 9 years
Indonesian rate of increase in consumption: +4.1%/year; most recent peak to zero net exports in 8 years
Note that Saudi Arabia is currently showing, at least in dollar terms, increasing cash flow from declining net export volumes.
The Saudis are not in a bind. The Saudis and the rest of the Gulf States are making more money than ever. They have an enormous current account surplus (http://www.rgemonitor.com/blog/setser/233979/). Where do you think they're getting the money to buy all those chunks of failing U.S. banks?
Demand is so inelastic that it actually makes sense for them economically to consume more of their production at home.
You beat me to it!
They will have plenty of crude oil long after there is, for all practical purposes, none left for 'net importer' countries to import.
So, as long as nobody steals their oil or blows up their oil wells or comes up with a viable alternative to oil they will be one of the last countries to be in a bind!.
They don't need to export any more oil than required to balance their trade.
Why are they exporting more than they need to now, as it is taking an unnecessary financial risk?
They need to make their oil last as long as possible, since without it they are probably literally dead - KSA is a very hot desert!
IMO, in the future if you want their oil you will have to trade something they need, like food.
Pieces of paper from heavily indebted nations that say something like 'I promise to pay the bearer in 30 years' probably won't do! - would you take that risk?
Right, also think of the profits for Saudi Arabia if their decline rate is slower than the decline rate for the rest of the world.
All that money must make your head swim Moe, but you can't eat, drink, nor actually swim in it.
Saudi is not is an enviable position IMHO.
Money ain't $hit but $hit might be money some day;-}
Hi Moe,
re: decline rate slower
Do you have any reason to think this might be the case?
The Saudis may not be in a bind right now but they sure will be if the global economy ever collapses. Saudi has 22 million citizens, not counting 5.6 million expats, and their population is growing at one of the fastest rates of any nation on earth. Saudi imports virtually everything except oil, dates and camels. All their industry, such as it is, is manned almost entirely by expats. And that industry is dependent entirely upon imported raw material.
Saudi does not produce enough food to feed more than three million people. They will be in a huge bind if anything happens to food imports. And eventually, something will happen to food exports from the rest of the world, which means......
Ron Patterson
Ron says that “Saudi imports virtually everything except oil, dates and camels”. Well, according to Wikipedia the Saudis actually import camels from Australia:
“Australia boasts the largest population of feral camels and the only wild herd of dromedary (one-humped) camels in the world. Live camels are exported to Saudi Arabia, the United Arab Emirates, Brunei, and Malaysia where disease-free wild camels are prized as a delicacy. Australia's camels are also exported as breeding stock for Arab camel racing stables.”
Tasman, thanks for that bit of information. I was totally unaware of that fact. Shipping camels to Saudi Arabia! Imagine that. A little like carrying coals to Newcastle wouldn't you say?
Thanks again, Ron
Saudi Arabia will soon be importing coal as well from Australia.
Best Hopes ?
Alan
I wonder about that. Can Australia really increase coal exports?
http://www.smh.com.au/news/business/coal-sales-deferred-as-newcastle-shi...
http://www.sxcoal.com/en/doc/show.asp?typeid=1000&f_id=18512
I'm still curious about where you can drive in Saudi Arabia. And only half (at most) of the population drives! Whatever are they doing with all that gasoline?
Who said it was gasoline?
Saudi Arabia has gotten smart. Instead of selling us oil and making 30-50% barrel, they are refining the oil, or making plastics or making fertilizer or whatever and making a A LOT more money.
If I read the original story correctly, it said gasoline consumption was up 65%
Does that mean they are selling finished product? And if so, how does that figure into the "export land model?" I'm a little confused now. Does "Export Land" refer only to crude oil and NGL? Or all petroleum products -- including fertilizer and plastics -- that are produced in a country?
The 65% number referred to the month to month increase in refinery utilization. For 2007, gasoline consumption, according to the story, was up 9.7%.
As many of us have speculated, Saudi Arabia may have boosted crude oil exports (and caused fourth quarter production estimates to go up) while also boosting liquids imports, because of refinery maintenance.
Net Exports measures total liquids production & consumption, resulting in net exports/imports.
Fertilizer is made using natural gas, and plastics from ethane etc. Their refinery output has gone to local consumption, although this will change:
I have a friend who lived in Saudi Arabia in the 80s, and he drove all over the country -- at 100+ mph.
I saw a youtube video of luxury cars and suvs in Dubai, UAE - if you think the US has gas guzzlers, you should see those. 8+ cylinders for virtually everything.
Dubai street racing videos on YouTube are a comedy goldmine!
It's pretty apparent that almost all the drivers in those videos have invested large chunks of oil wealth in high performance machines and very little in high performance driving lessons.
Watch the Burnout International. Watch the 3rd one in Iraq.
Got to watch, very entertaining. Only a minute long or so.
http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=268...
Another big factor is demographics. The average Saudi family has something like six to seven kids. And remember the positive feedback loop. At least in dollar terms, Saudi Arabia will almost certainly show increasing cash flow from declining net oil exports.
I try to avoid offering investment advice, but I do ask questions. If one accepts the ELM premise, doesn't that mean that world stock markets are overvalued and oil is undervalued?
Regarding the depression aspect and its presumed impact on consumption, check out world oil consumption from 1930 to 1940. Granted, the US was still in the early stages of the auto age in the Thirties, but the key difference between the Thirties and now is that in the Thirties millions of people wanted to drive cars for the first time, while today billions of people want to drive cars for the first time.
Traffic in Saudi Arabia is absolutely atrocious. The streets in the towns are jammed bumper to bumper and the traffic between cities is jammed also. They have 5 million expats and most of them drive, plus every Saudi family that can afford a car has one.
Saudi is a big country and the cities are, for the most part, very far apart. This means lots of time on the road when you are going from city to city.
There are no trains in Saudi so everything moves by truck. Huge Mercedes diesels, the favorite truck in Saudi, jam the roads in Saudi. And they drive like hell. Saudi must import almost everything except oil , dates and camel meat. Everything else must be imported. Virtually all the cargo import terminals are on the West Coast so everything must be trucked east to reach the interior and the East Coast ARAMCO infrastructure. There are a few cargo terminals on the Persian Gulf coast but they are nothing compared to those on the Red Sea.
Saudi probably has more road miles driven per capita than any nation in the Middle East.
Ron Patterson
Everybody drives in the KSA, the women are chauffered.
The capital Riyadh is a huge grid of roads just like the USA, with fast food places and shopping malls just like in the USA.
Even in Riyadh (situated where it is because it's cooler at altitude) it is extreemly hot in the summer, almost nobody walks far, just like in the USA - only the slaves work out in the sun.
http://en.wikipedia.org/wiki/Riyadh
The slaves cars are so old they mostly don't have aircon in my experience.
The gasoline is cheaper than water - they even lowered the price of gasoline when I was last there - that's not like the USA!
LOL Xeriod! It's true! In the US only "losers" walk or bike or bus. They have to work out in the sum, and yes, slaves' cars in the US often have no aircon. Except for very select places in the US, no one walks if they can possibly avoid it. In any small town or city, anywhere really, someone riding a bike is presumed to have lost their drivers' license or be too poor to have a car. And a great many are too poor to have a car, too.
Someone pointed out to me years ago that it's no accident that the rich area of Newport Beach is cheek-by-jowl with the poor ghetto of Costa Mesa, he said that Wherever you have rich, nearby there will be the very poor. His statement kind of pissed me off at the time, but it made me observe what I'm not supposed to see, and he's turned out to be right, everywhere I've lived.
Well, you've got to have SOMEONE to make your food and take out the trash, right?
I'd rather see the rich starve for lack of a maid and die in a pile of their own un-taken-out trash thank you.
"In the US only 'losers' walk or bike or bus"
I live in small city and usually walk to work (about 3/4 mile each way). People think I'm nuts. They pull over in their cars to the side of the road when they see me walking, ask me if my car is in the shop and do I need a ride. They just can't understand that I prefer to walk. Clears my head in the morning before work and helps me unwind after a busy day.
They might eventually get the message. I've walked to church for seven years and about three years in to the process people stopped stopping me and asking if I wanted a ride.
Well, women are not allowed to drive.
True.
Also, if you're a femail and not a muslim it is almost impossible to enter the country!
If you are a femail and don't cover your head in public you will likely be beaten by the religious police!
and on and on ...
Really? My wife was there with me for five years. When Western women went out in public, they did respect the Muslim tradition somewhat, but not to the extent you say. They did cover their arms but not their head. My wife never wore a head scarf or anything else on her head.
There were also many Western nurses working in the country, most of them Filipino. I also knew of one Western woman that worked for ARAMCO. I don't know if her husband was there or not however. I only saw a write up about it in the ARAMCO news. But many of the ARAMCO wives worked as secretaries for ARAMCO.
Ron Patterson
...if you live in a Banana Republic you eat bananas -by the bucket load...
...if you live in KSA and are sitting on top of the biggest oil patch known to man...
KSA is going to go down the route of consuming as much oil as possible for as long as possible. The rest of the World is going to have to come up with the alternative solutions. I think we can easily count on 10%-15% Demand growth in the ELM model for KSA.
ITSHTF those 5 million Expats and a hundred thousand of the top Saudies will flee -they like Mayfair- and the rest will be left to die off or migrate out. But probably long before this we would see the US move to 'protect global energy supply interests': In a world in Energy crisis mode they would probably get away with it...
Today's FT has a column on oil price volatility. The author cites seasonal fluctuations in domestic oil consumption in the Gulf. To wit, tightness in natural gas causes diversion of oil to power generation in the summer. It would seem that the ELM price effect may have a seasonal dimension.
Opec policies set to ensure oil prices stay on the boil