Vehicle fleet growth to sustain oil demand

Bob Tippee
Managing Editor-Economics and Exploration

Progress in U.S. Passenger Car Emissiins [15076 bytes]

The size and number of oil-fueled vehicles will sustain growth in worldwide demand for petroleum well into the next century. Top economists of several major oil companies made vehicle trends central to market projections presented at the Middle East Petroleum & Gas Conference in Abu Dhabi early in March.

Market potential

Kathleen Cooper, chief economist of Exxon Corp., cited currently "minuscule" per capita car ownership in the Asia-Pacific region and Latin America as one basis for expectations about high demand growth in those areas. In addition, she said, gross domestic product (GDP) per capita remains low, leaving great room for economic growth. And the historic tendency has been to underestimate demand growth in Asia and Latin America, commonly viewed as oil's growth markets of the future. Cooper projected world GDP growth of 3%/year through 2010. The economic expansion will raise worldwide demand for oil by that year to 95 million b/d. The Exxon economist noted that of a total oil and gas resource base estimated at 4.7 trillion bbl of oil equivalent (boe), 1 trillion boe has been produced, and about 70% of the total is outside the Middle East. Furthermore, as much as 80% of the remaining, undiscovered resource is accessible by private capital, Cooper said, compared with roughly 35% before 1990. But the opportunities are "technically challenging and capital-intensive."

Economic growth effects

Theodore R. Eck, Amoco Corp.'s chief economist, said a 1% gain in worldwide income produces an increase of about 1% in consumption of transportation fuel. He noted that transportation accounts for about half of current oil consumption and predicted that the market sector will account for at least two thirds of future demand growth. Worldwide economic growth raises both the number of vehicles and requirements for vehicle performance, Eck said. With new vehicles now "extremely clean," he added, toughening environmental standards won't restrict fleet growth. The world, Eck said, can "double or triple the number of vehicles and still have cleaner air." Like Exxon's Cooper, Eck said the developing world provides plenty of room for the vehicle fleet to grow. In the developed world represented by the Organisation for Economic Cooperation and Development, average vehicle ownership is 494 units/1,000 persons; in the rest of the world, the average is only 23 vehicles/1,000 persons. Worldwide, vehicles are increasing in size so that expansion of the vehicle fleet is outrunning improvements in fuel use efficiency. "The family car is no longer a car," Eck said. "It's a truck."

Air quality progress

Anthony J. Finizza, chief economist of ARCO, cited historic progress in the air quality performance of passenger cars and said further improvements will come (see chart). Contrary to expectations of the California Air Resources Board, which imposes the strictest vehicle emissions standards in the world, Finizza noted, some gasoline-powered vehicles qualify as "ultralow-emission vehicles," which means their tailpipe emissions don't exceed 0.4g/mile of non-methane organic gases. Among alternate-fueled vehicles, the ARCO economist said fuel cells look promising, and fuel cells fed by reformulated gasoline are "gaining ground.

Supply growth

With demand growth continuing, supply growth has momentum of its own, said Peter Davies, chief economist of British Petroleum Co. plc. "Investment in technology will continue to drive oil supply," he said. But other forces are at work, including:

Better than expected production performance by mature fields, thanks to continuous improvements in cost reduction and technology.
Large new discoveries in places such as Colombia, the deepwater Gulf of Mexico, the West of Shetlands area off the U.K., and West Africa.
Expansion of existing producing provinces.

Davies expects these forces to remain at work, with exploratory hot spots shifting to elsewhere in Latin America and Africa.

Short-term outlook

In a short-term outlook, Herman Fransen, director of Petroleum Economics Ltd., Washington, D.C., pointed to a switch in oil price patterns to "contango," in which prices of volumes for immediate delivery fall below those of volumes sold for future delivery. The pattern is a sign of market weakness. Fransen said the market is moving away from the "absence of surplus" that characterized 1995-96. The strong stock draws of that period were evidence of market tightness and not deliberate policy, although overall, companies have learned to work with relatively low inventories. This year, he said-which "won't be as good as '96" for prices-supply from outside of the Organization of Petroleum Exporting Countries has the potential for strong growth. And "more and more OPEC countries are acting like non-OPEC countries"-ignoring quotas designed to support prices.