by Matthew Simmons

I was leafing through the Energy Information Administration’s December 2008 issue of International Petroleum Monthly when one graphic – Table 4.6, “OECD Countries and World Petroleum Demand, 1970-2007” – caught my eye. That’s 38 years of data, all in one chart. Random numbers? Hardly. The big-picture conclusions raise some interesting issues.

For instance:

• Between 1970 and 1979, world oil demand grew from 46.8 million barrels per day (mmb/d) to 65.2 mmb/d, a jump in 10 years of an astonishing 18.4 mmb/d. This, incidentally, is how we ate up all the world’s spare capacity and at the same time caused U.S. supply to peak. Thus, the price of oil skyrocketed.
• From 1979 through 1983, demand fell four straight years, retreating back to 58.8 mmb/d. Most of this change came as oil ended its role as a prime feedstock for power generation. This probably would have happened even if oil prices had not gone so high, as the world was finally rolling out nuclear fuel.
• Once demand hit bottom in 1983, it quietly began to grow again, though the growth was masked by the beginning of a prolonged collapse of oil use throughout the USSR. Nevertheless, total world demand grew from the 58.8 million base in 1983 to 68.9 million in 1994, an increase of 10.1 mmb/d. This increase, interestingly, came at a time when most of the oil pundits were wringing their hands, declaring that oil demand was so stagnant that low oil prices were the new world order.
• In 1995, global oil demand finally edged over 70 mmb/d for the first time in history. Between 1994 (the last time it was under 70 mmb/d) and the end of 2008, demand grew to 85.9 mmb/d – a jump of 17 mmb/d in 13 years. This explains why we used up every last pocket of spare productive capacity and ran out of drilling rigs.

A Dangerous Bet

There was one final data point of interest from Table 4.6. Despite the ups and downs of our global economy over this 38-year period, there were only seven years when global oil demand did not grow, and four of those were during the shift to nuclear power.

Betting against demand for oil growing – despite widespread sentiment that oil demand growth was soon to end, particularly as prices started their long march from 1986 lows to July 2008 highs – ended up being a very dangerously bad bet.

My big question going forward, though, is not how deep demand will fall, but whether it can ever reenter the growth path it had enjoyed for so long, particularly since supply is unlikely to ever keep pace. If I am correct that global crude oil production has already peaked, demand for oil will have to stop growing and begin to decline. This is simply the law of nature.

Raw Numbers and Real Conclusions

It is always interesting to look occasionally at raw numbers and see if you can develop a story from them. The oil-demand story is one of my favorites.

This is off the top of my head, but taking the best data for oil demand going back to 1919, I estimate that there were only seven or eight years when it ever declined, and all were either in the midst of the Great Depression or mired in World War II, when demand dropped due to rations.

There were periods in all this when six-month demand was lower than the year before, or when the United States had 18 months of falling demand after Desert Storm. But I can draw only one real conclusion: Overall petroleum demand growth was one of the most durable growth sectors of the 20th-century global economy.

Matthew R. Simmons is the chairman and CEO of Simmons & Co. International and the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

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