June 23, 2008 | posted by Michael Baxter in Oil |

So, Gordon dropped in on OPEC this weekend.

After collecting his luggage from Jeddah airport he said, “There must be a new deal between the oil producers and consumers. I am going to make it absolutely clear that we are going to reduce our dependence on oil. I want the oil-producing countries also to diversify out of oil and I want us to get a more balanced energy market.”

But Chakib Khelil, the top man at OPEC said, “Asking OPEC member countries to increase their offer is illogical and irrational.”

But who is right?  Some recent data from the latest BP Statistical Review helps illuminate the true picture of the global oil business.

GB, of course, reckons it’s all down to supply not keeping up with demand; that OPEC needs to do more. If it doesn’t, goes the warning, the West will reduce its reliance on oil.

There’s no doubt, spikes followed by big crashes in the price of oil are hugely damaging to the global economy.  It is all very well Brown talking about ending boom and bust, if oil, the commodity that seems to underpin the global economy, goes through these regular peaks and troughs.

But then again, what can OPEC do?  Maybe we are just running out of the black stuff. Maybe we just can’t keep up with surging demand.  Maybe these subsidies which some developing nations are putting on oil is distorting the market.  Consumers in those countries are not making the cut-backs they should, because they are not paying the true market price for the black stuff.

That’s what GB thinks.  The subsidies in countries such as India and China “hurt the poor,” he said.

Saudi Arabia is responding to Gordon, and is putting a few hundred thousand more barrels a day into his begging bowl.

But the rest of OPEC seem unmoved.   OPEC’s Mr Khelil, by contrast, blames a shortfall in refinery capacity, speculation and geopolitical tension.

But what do the numbers say?

Last week, BP released its annual statistical review of the oil industry, and it makes a fascinating study.

First off, it is true that oil consumption is rising fast.  From 1968 to 2007, oil consumption doubled.     But has production kept pace?  Answer no, but it only lags behind by a whisker.  While it took 38 years for oil consumption to double, it took 39 years for production to double.  Supply lags behind demand, but by a tiny amount.

Secondly, what about peak oil?  Well, the world’s proven oil reserves  have jumped from 667 billion barrels in 1980 to 1237 in 2007.  So that is a fair rate of increase, and by the way, in percentage terms, much faster than the change in consumption.

More worryingly, between 2006 and 2007 both proven oil reserves and production fell – but only by a fraction.    It has happened many times before, so don’t read too much into the fall in one year.

And what about India and China?  Yes it is true, both have seen a massive rise in their consumption of oil.

Since 1965, India’s oil consumption has increased by about 11-fold.  In China, the increase was nearer 30-fold.  

The US, however, remains by far and away the world’s biggest consumer of oil.  In 2007, US oil consumption was around double the level in China.

Asia as a whole does, however, now consume more oil than the US, around half as much again, in fact.

We don’t need to tell you that the population of Asia is many times greater than the US, so oil consumption per capita in Asia is still tiny, compared to the US.

As for the UK, China’s consumption of oil overtook us in the mid 1980s, and India’s around ten years ago. Today, China consumes about four times more oil than us, and India about half as much again.

So what conclusions can we draw?

There is no doubt that the subsidies in Asia don’t help.  But, North America and what BP calls Eurasia, that’s Europe and much of the former Soviet Union, account for 52 per cent of global oil consumption in 2007.

The US accounted for 23.9 per cent.

A small reduction in demand in the US and Europe will have a big impact on the global balance between production and consumption.

Looking further forward, the key will be whether the slight dip in production and proven reserves seen in 2007 becomes a trend, or is a one-off. The answer to that question will determine the price of oil in the longer-term.