CIBC Debunks - Non-OECD Oil Consumption Will Be Income, Not Price Sensitive

[Lukester]

This article directly discusses what I have been trying to clarify in prior posts regarding the much cherished "marketplace discipline" which some believe will be exercised upon the petroleum spot price in the next five years. People who insist this rule is "inviolable" and will create "demand destruction" only have half the equation.

CIBC points out the OECD world will bear the brunt of demand destruction, but that non OECD demand is not price sensitive at this stage of their industrialisation - it is income sensitive - and that is an entirely different point.

This reiterates my previous points exactly - people who have engaged in heated debate here on the "inviolability" of the demand destruction principle as a mechanism relative to PRICE are employing first world economic paradigms incorrectly in non OECD nations, and consequently will persistently obtain incorrect results.

I would not be reiterating this so bluntly, had some of those objections not been quite so peremptory (I've been given to understand that "anyone who objects to the presumed universal self-regulating law of the supply / demand in the marketplace is revealed to be hopelessly naive").

It's actually OK to be peremptory (within decently mannered limits), but if you are going to be peremptory, it's critical to also be correct.

Unfortunately I am unable to strip this text out of the PDF, and although these page images have been sampled at larger size the iTulip server limits page dimensions.

For those pressed for time, the text on Page Three is sufficient. The point made being is that "demand destruction" in the non-OECD world is the least likely hypothesis, because it is indeed not remotely as price sensitive as in the OECD world. It sounds counterintuitive - one would think "richer nations have more to spend on oil", but CIBC does not agree. Further, they point out that in 5 years non-OECD energy consumption will exceed the OECD consumption, while also persisting in much more dynamic consumption growth than in the industrialised mature economies of today. Go figure, eh?.

( Postscript - DUH! Post the PDF link for better readability. - http://research.cibcwm.com/economic_public/download/feature1.pdf )



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[GRG55]

This article directly discusses what I have been trying to clarify in prior posts regarding the much cherished "marketplace discipline" which some believe will be exercised upon the petroleum spot price in the next five years. People who insist this rule is "inviolable" and will create "demand destruction" only have half the equation.

CIBC points out the OECD world will bear the brunt of demand destruction, but that non OECD demand is not price sensitive at this stage of their industrialisation - it is income sensitive - and that is an entirely different point.

This reiterates my previous points exactly - people who have engaged in heated debate here on the "inviolability" of the demand destruction principle as a mechanism relative to PRICE are employing first world economic paradigms incorrectly in non OECD nations, and consequently will persistently obtain incorrect results.

I would not be reiterating this so bluntly, had some of those objections not been quite so peremptory (I've been given to understand that "anyone who objects to the presumed universal self-regulating law of the supply / demand in the marketplace is revealed to be hopelessly naive").

It's actually OK to be peremptory (within decently mannered limits), but if you are going to be peremptory, it's critical to also be correct.

Unfortunately I am unable to strip this text out of the PDF, and although these page images have been sampled at larger size the iTulip server limits page dimensions.

For those pressed for time, the text on Page Three is sufficient. The point made being is that "demand destruction" in the non-OECD world is the least likely hypothesis, because it is indeed not remotely as price sensitive as in the OECD world. It sounds counterintuitive - one would think "richer nations have more to spend on oil", but CIBC does not agree. Further, they point out that in 5 years non-OECD energy consumption will exceed the OECD consumption, while also persisting in much more dynamic consumption growth than in the industrialised mature economies of today. Go figure, eh?.

( Postscript - DUH! Post the PDF link for better readability. - http://research.cibcwm.com/economic_public/download/feature1.pdf )



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Non-OECD consumption is less price sensitive because most of the oil exporting economies, and a number of importing countries (notably both India and China) subsidise the use of at least some petroleum products.

Excerpt from an earlier post on one of the peak oil threads:
http://www.itulip.com/forums/showthread.php?p=24220#poststop

...OECD consumption has definitely been declining. On the way up, the pundits said the US economy would collapse when oil hit $60 - that didn't happen, but the data clearly shows that OECD consumption has been falling since then, while non-OECD continues to grow. Looking beyond the differences in economic growth rates and the higher petroleum dependency per unit of GDP, there's also:

the majority of OECD consumers are exposed to the impact of oil price changes; non-OECD consumers, especially those in oil exporting countries (OPEC, Russia, Venezuela, etc) are generally paying prices well below OECD norms (where I live the retail gasoline price is less than 1/4 current US prices, and that's expensive for the Gulf). Those that expect these subsidies to decline with rising oil price may be wrong. As the differential increases, and the adjustment for consumers becomes greater, history shows it actually becomes more politically difficult for governments to remove the subsidies. Usually it takes a financial crisis that forces the government to abandon subsidies it can no longer afford; I don't see that happening any time soon in China, India or any oil exporting nation. There's a good chance that non-OECD oil demand will continue to be surprisingly strong as those consumers continue to be at least partially shielded from price signals. That forces more of the price rationing adjustment onto the non-subsidized OECD economies.
Developed country economies have not only price incentive, but also financial ability to purchase and better access to alternate/conservation technologies; inevitably these are being applied much faster in the USA et al than India or any African nation (try to find a hybrid in a non-OECD country :))...Just for grins, if the US market downdrafts tomorrow and Toronto has another grim day like today, I am finally going to start nibbling on some of the beaten down Canadian natural gas equities I have been tracking for some time. We may be going into a debt deflation bear market, but I don't see any evidence that people are going to stop heating their homes, using electricity, or that the cost of finding, developing, transporting and distributing North American natural gas is going to get cheaper any time soon.

[Lukester]

I am finally going to start nibbling on some of the beaten down Canadian natural gas equities I have been tracking for some time.

Spoken like a contrarian and well positioned opportunist. Beaten down ain't the word - some of these stocks are so cheap vs. their forward fundamentals it's an almost comical testament to the gaping investor misconceptions as to the real nature of the energy markets that are starting to barrel into the world already. Global recession, if it even materialises for more than a quarter or two, will pull the wool over a lot of eyes as to the extraordinary bargains in this area. Buy on the cheap - is good!

In a mere 3-5 years there will remain little margin to smile about anything whatsoever in the prices we'll be facing in this market. Or perhaps I should say, you'll be smiling, but the rest of us won't.