We are currently seeing oil prices fall as the world seems awash in oil. By any reasonable view, supply exceeds demand. How true is this?
The International Energy Agency estimates global demand for crude at 96 million barrels of oil per day (b/d). They point out that crude production breached 97 million b/d in late 2015. So the world has an excess oil production of about 1 million b/d. (The US Energy Information Administration estimates global oil inventories increased by 1.3 million b/d in November 2015)
Much to the annoyance of OPEC, the US fracking industry has become the swing producer. Whereas Saudi Arabia has traditionally been the producer with the critical mass to increase or decrease production to maximize the market price for a given demand, that role was usurped when the fracking industry started to generate large amounts of oil. The US fracking industry productivity has risen by 50% over the past five years. Moreover, this technology will be exported to other oil producing regions, ensuring rising production.
The US-based U.S. Energy Information Administration shows US crude production at 8.7 million b/d for 2014. For the first nine months of 2015 consumption was up 3% compared to 2014 but domestic production grew nearly 17%. The consumption forecast for 2016 is an anemic 0.6%. Projected U.S. crude oil production averages 9.3 million b/d for 2015 and 8.8 million b/d in 2016. The oil glut looks to stay around for a while.
Cheaper oil is putting more cash in consumer pockets, which is then spent on other items. But cheaper oil has also meant growing consumption. But countering that trend are newer and more fuel efficient automobiles, including hybrids, that have taken a larger share in the market and improved overall fuel economy as old gas guzzlers are replaced with modern technology. While some feel that 0.6% increase in consumption might be way too low, technology continues to lower demand. Plus, the excess supply situation could be exacerbated by the softer Chinese economy.
However the US fracking output is going almost certainly going to keep US prices low.
And if the following chart tells us anything, global supply is also looking more robust than demand. If China does slow down, as many expect, the oil market imbalance will grow.
In summary, cheaper oil is excellent news for the airline industry worldwide. The juicy profits are likely here to stay. Moreover, airlines can be expected to sit on older aircraft for a while longer because the fuel cost is simply not as much of an issue. Industry load factors are strong and fares are not coming down in sympathy with oil prices.
Of course the longer this excess supply of oil continues, the more those huge backlogs at Airbus and Boeing start to look fragile. If the industry was certain that oil prices will remain low, we would likely see a series of delivery push-backs and deferrals, just as Boeing and Airbus are ramping production rates to record levels.
Should a war break out between Iran and Saudi Arabia, all bets will quickly be off, as the Middle East remains a powder keg. But the US should be relatively secure, with its production capacity, so we might not see $80-$100 per barrel oil again for a decade – good news for airlines and consumer wallets.
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.
It’s really hard to think like an environmentalist. Because when prices are this low, the only producers that make money are the cleanest ones: the one pouring out of the ground when you stick a pipe into it. But cheap prices makes people buy hummers again, stifles innovation into hydrogen and batteries (the ROI of a more expensive car/plane based on fuel prices takes a LOT longer).
But higher prices means that fracking and tar sands become viable again. Fracking and its earthquakes and water pollution (refer to the farms in Pennsylvania that can be bought for 10k$, no clean water, no humans = wasteland). And tar sands, as much as I would cheer my own country, we all have to agree that this is not very clean energy.
So, which one is worse for our kids (or, to think like first nations/Mohawks = make decisions thinking for 7 generations after ours)? Cheap oil and its gas guzzlers? Or expensive oil and its dirty extractions?
I don’t know, it’s almost as if the cheap oi, is the lesser of the two evils? I’m ready to be flamed now 😉 Yes, I do have a car, and to make matters worse, it’s a VW Jetta Diesel!! You know, when you make the math, you’d hope you have the right numbers. So here I am, the guy trying to calculate ROI, pollution, etc. And, in the end, I’m the one polluting all my neighbors. This is the world we live in. Sorry everyone for my stupid car, I hope the gov sends you some money too and not just to the owners of VW diesels. After all, the air we breath and the water we drink is a common good, like the airwaves. In the end, one way of the other, humans will find a way to destroy this planet. And we’ll all be trying our best to slow it down but we will do it. Unless it gets rid of us first.
HAPPY NEW YEAR 😉
Personally, I believe that the effect of fuel price on the demand for new aircraft is generally overstated. Aircraft will suffer from material fatigue whether fuel prices are high or low, and eventually replacement is unavoidable. Further, additional aircraft are needed for growth, perhaps even to a greater extent if fuel prices are low than if they would rise dramatically. Also, delayed retirements can only have a temporary effect on fleet size in any case, and if fuel costs rise then all of a sudden a large number of over-age aircraft will have to be rapidly retired, and ultimately the net effect is plus/minus zero. Lastly, it may not be very easy to defer deliveries of contractually committed in-production aircraft on short notice, without incurring penalties in one form or another. I believe this view is supported by empirical data; there are no backlog swings that in any way matches the volatility of fuel price.