Why You Shouldn't be Worried About an Energy Demand Slowdown
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Why You Shouldn’t be Worried About an Energy Demand Slowdown

by | published August 21st, 2019

There has recently been much media coverage about an impending decline in aggregate global energy demand.

The argument here – as always – involves a flattening or even decline in energy prices as several factors combine to suppress the need for energy in slowing economies.

Much of the logic behind what pundits are saying here extends from an ongoing U.S.-China trade war, statistics “massaged” to justify another round of short plays, and anecdotal concerns over economic strength issuing from a range of factors – Brexit, Venezuela’s implosion, civil wars in Libya and Yemen, another credit crunch in Italy, among many others.

Traditionally, the relationship seemed straightforward enough. Production, commerce, exchange, transport, and the like generated the need for energy. That translated into a demand on providers, which in turn determined the supply required and the price.

Somewhere along the line, predictions about future conditions came to be controlled more by what current energy traders needed to make now, rather than about any solid estimate of where markets were likely to be in six months.

Six months continued to be the rule of thumb for one simple reason: it usually takes half a year for the genuine figures upon which to base substantive demand judgments to emerge. Before that time, talking heads pontificate, and knee-jerk reactions ensue.

This is the situation we once again find ourselves in as we move into the third quarter of the year.

There’s A New Energy Powerhouse in Town

The “revelations” of a global pullback are more apparent than real, much of which is based on presumptions rather than data. Even when data appears, it is applied in some rather strange ways.

Let me be rather direct here. There is, as yet, no tangible, solid indication that any prolonged slowdown is taking place.

Consider the following three telling signs:

First, commentators have pointed to a reduction by the likes of OPEC and the International Energy Agency (IEA) in demand projections for the end of 2019. What these dispensers of doom deliberately fail to mention is the fact that those projections are still higher for the year as a whole and will come in at all-time records.

Demand continues to rise in Asia, the engine generating the bulk of energy use for the next several decades, and is doing so at a rate more accelerated than expected. The Asian picture is driving energy demand these days, not the established economies of North America or Western Europe.

And then there is the developing situation someplace else.

While most eyes are on the question of when India will replace China as the primary focus of Asian expansion, it is escaping notice that another dynamo is emerging to drive both economic development and the energy demand associated with it.

Africa.

This continent is fast becoming the next hot prospect for energy investment, and is the largest untapped economic market left.

For energy demand to move down appreciably and for any length of time, there needs to be an absolute contraction in global economic expansion. That is not happening. What we do have are selective (and intermittent) slowdowns in an energy picture that is still rising.

Looking Past an Economic Downturn

Second, energy demand does reflect a repositioning in energy sources.

New energy provisions are coming more from renewables and improved efficiency than from more traditional hydrocarbons.

Still, while the overall energy balance is changing as a result, one interesting fact is still very clear: pushing out estimates to 2035 or even 2040, the three primary global sources today – crude oil, natural gas, and coal – will still be at the top of the table.

Remember, given the rapid rise in exports and cross-border transfers, the provision of energy is no longer a regional matter.

Coal, for example, may be on the wane in Europe and North America, but it will remain for some time as a primary energy source in Asia, where the brunt of the world’s energy demand is rapidly moving.

Therefore, a reliance on viewing oil demand as the sole indicator of energy demand in general is becoming less a reliable methodology.

Of interest is one deliberately overlooked factor.

If we are in such an international economic downturn, why is the global generation of electricity at record levels, with increased demand in Asia moving higher than even the most optimistic predictions of a few years ago?

Looking at the next impact on prices brings us to the third point.

The Last Four Estimates Show Where We’re Heading Now

By examining only oil, we have an established an ongoing countermeasure.

Demand fluctuations are more than offset by major producers reducing supply. Once again, there is a balance sought here and it is centered in the continuing OPEC-Russia agreement to cut production.

This pricing level for the raw material, after all, is what energy investors are looking at most. As prices stabilize in response, demand elasticity rises to augment available supply. This states that, all other things considered, perceptions of subsided prices prompt great energy use.

Simply put, we tend to use more of something when the price is lower.

That, in turn, moves the price back up as demand for a given supply increases.

What is driving what is behind the current projections in energy use are perceptions, not hard analysis. Any geopolitical interruption of supply, a difficult winter, or increasing end-user needs will alter the view very quickly.

Consider the following as my final thought for today.

While much is made of the OPEC and IEA estimates for demand at year’s end, in each of the last four times in which both made downward estimates moving into the third quarter of the year, they revised the totals back up when the final yearly figures came in.

So much for the self-aggrandizing pitches of guys who just want to run shorts.

Sincerely,

Kent

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  1. Rosina Abdullah
    August 24th, 2019 at 19:36 | #1

    Hi Mr Kent Sir, hope all is well, just want to say I am always impressed with all of your reports and documentries and do look forward to your E Mails and to hearing from you.also wanted to say I have bought some shares in the EWI hope that it does well going forward.Thanks much!!!
    Keep Well.

  2. September 12th, 2019 at 11:20 | #2

    Thanks you for a wonderful insight

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