Compare the Last Great Oil Shock

With the price of gasoline rising almost every day and crude prices just off record peaks, it brings back memories of the last great oil shock, in 1980.  It might be useful to take a look at how world oil consumption has changed since then.  The data comes from the BP Annual Statistical Review. Unfortunately the 2008 edition is not out yet, so the latest data is for 2006 (the 2008 edition will have the 2007 data).

 - In 1980, the world consumed 61.731 million barrels per day (mb/d); in 2006 it was consuming 83.719 mb/d.

 - In 1980, the U.S. consumed 17.062 mb/d or 27.6% of the world total; in 2006 it consumed 20.589 mb/d or 24.1% of the total.

 - In 1980, Europe's big four (Germany, France, Italy and the U.K.) consumed 8.962 mb/d (14.5%); in 2006 8.148 mb/d (9.7%).

 - In 1980, Japan consumed 4.936 mb/d (8.0%); in 2006, it consumed 5.164 mb/d (6.2%).

 - In 1980, the OECD [The Organisation for Economic Co-Operation and Development, a group of 30 member countries who discuss and develop economic and social policy] consumed 66.5% of the world's oil; in 2006 that was down to 58.1%.

 - In 1980, the whole of the Middle East consumed 2.046 mb/d (3.3%); in 2006 5.923 mb/d (7.1%).

 - In 1980, China consumed 1.694 mb/d (2.7%); in 2006 it consumed 7.445 mb/d or 8.9%.

 - In 1980, India consumed 0.643 mb/d or 1.0% of the world's total; in 2006 it consumed 2.575 mb/d or 3.1% of the world's total.

 - In 1980, the U.S. was producing 10.170 mb/d, or 16.2% of the world's total.  In 2006, the U.S. produced 6.871 mb/d, or 8.4% of the total.
 
 - In 1980, U.S. production was 59.6% of consumption; in 2006 it was 33.3% of consumption.

 - In 1980, Saudi Production was 10.270 mb/d, almost identical to U.S. production.  In 2006, it was 10.859 mb/d.

 - In both 1980 and 2006, the U.S. was the third largest oil producer (after Saudi Arabia and USSR/Russia).

 - From 1979 to 1980, high oil prices (and the economic slowdown it caused) caused world consumption to fall by 4.1%.  World consumption continued to fall until 1983 by an additional 6.2%.

 - Currently existing fields worldwide are declining at approximately 4.5% per year.  This means each year the world has to bring on line the equivalent of another Nigeria plus another Indonesia, just to keep production flat.

So what can we conclude from these factoids?  Well for starters, the shape of world demand has shifted significantly.  Back then, oil demand was almost entirely about what the big industrialized countries were consuming -- over half of world consumption came from just six countries.  Since then, the rest of the world has become much more important. 

Secodly, using less oil does not mean economic collapse.  Since 1980, consumption is actually down in the Europe big four by 9.1%, and Japan's consumption is up only 4.6%.  Despite our consumption rising by 20.7% over that more than a quarter-century span, as a percentage of the world it actually fell. 

The big question today is: Will we see world consumption decline again in response to high prices?  Will the emerging economies like China and India bring their consumption down the way the industrialized world did in response to the last oil shock?

It seems clear that high prices are the only thing that is effective in causing demand to decline.  I think that high prices are likely to be very persistent, and would continue to heavily overweight Energy in all portfolios. 

In particular, the offshore drillers like Transocean (RIG - Snapshot Report), Diamond Offshore (DO - Analyst Report) and Pride (PDE - Analyst Report) are very well positioned, as are oilfield equipment makers like National Oilwell Varco (NOV - Analyst Report).  Oil firms which have the ability to boost their production are also very attractive.  On the large cap front, first and foremost of these is Petrobras (PBR - Analyst Report). 

However, there are several much smaller E&P companies that fit the bill as well.  Some of my favorites are Double Eagle (DBLE - Analyst Report), Warren Resources (WRES - Analyst Report), Clayton Williams (CWEI - Analyst Report) and Petroleum Development (PETD - Analyst Report).

Read the full analyst report on RIG

Read the full analyst report on DO

Read the full analyst report on PDE

Read the full analyst report on NOV

Read the full analyst report on PBR

Read the full analyst report on DBLE

Read the full analyst report on WRES

Read the full analyst report on CWEI

Read the full analyst report on PETD