SUPPLY AND DEMAND

The theory of supply and demand is a fundamental theory of economics. In the free market, supply and demand will establish a balance for price and quantity. So how does supply and demand affect the oil and natural gas industry? Consumers, investors and producers are constantly wondering where the global and U.S. energy markets are headed and how to manage issues such as price volatility and renewable energy resources.

U.S. Supply and Demand
The United States produces approximately 8% of the world’s oil and consumes approximately 24%. U.S. crude oil production is highly sensitive to world crude oil prices. An increase in world oil prices is projected to spur production in the U.S. sometime in the near future. The Energy Information Administration (EIA) predicts that total onshore production of crude oil will increase from 2.9 million barrels per day to an estimated 4.1 million barrels per day by 2030. Onshore crude oil production also increases primarily as a result of increased application of CO2-enhanced oil recovery techniques. The EIA forecasts U.S. oil consumption to increase approximately 9% by the year 2030, and production to increase approximately 31%. Even with the increase in production, the U.S. will still consume more oil than it produces.

Natural gas prices are expected to increase at a modest rate in the future as demand increases and imports decrease. In North America, natural gas consumption grew by an above average 1.3%. Strong growth in demand was driven by the U.S., yet as prices began to weaken toward the end of 2008, the development of unconventional resources and strong drilling activity declined. This decline in production could produce a shortage of natural gas in the future. As a result, the decline in supply coupled with a modest recovery in demand should result in a tighter market for natural gas in the near future.

References: BP Statistical Review of World Energy June, 2009; EIA International Energy Outlook 2009

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World Supply and Demand
Global energy consumption growth slowed in 2008, yet among exporting regions such as the Middle East and Africa, energy consumption has remained robust. World primary energy consumption–including oil, natural gas, coal, nuclear and hydro power–grew by 1.4% in 2008. Despite the recent economic downturn, growing demand for energy, particularly in China, India and other developing countries, is predicted to lead to rising real oil prices over the long term. According to the EIA, world marketed energy consumption is projected to increase by 44% from now to the year 2030. Fossil Fuels are expected to remain the world’s dominant energy source, growing from 85 million barrels per day in 2006, to 107 million barrels per day by 2030.

Last year, global gas consumption grew by 2.5%, below the 10-year average. Chinese consumption grew by 15.5% and accounted for the largest incremental growth in world gas consumption. Natural gas now accounts for 24.1% of world energy use, the highest share on record. The EIA predicts natural gas consumption worldwide will increase from 104 trillion cubic feet to 154 trillion cubic feet by 2030.

As the global economy rebounds, so should the increase in consumption of oil and natural gas. The increase in consumption should help widen the gap between supply and demand, causing upward pressure on energy prices.

All over the world, renewable energy continues to grow and play a bigger part in our society, often benefiting from government support. Global wind capacity increased by 29.9% and Ethanol production rose by one-third. Although renewable energy continues to grow, it plays only a small role in the world’s energy mix.

References: BP Statistical Review of World Energy June, 2009; EIA International Energy Outlook 2009