Surging Demand for Fossil Fuels

Remember: This was originally written in late 2006, but it is interesting to see how things have progressed.

Dear Friend:

Do you eat, drink, and sleep fossil fuels?demand for fossil fuels

I know, most of you do not even want to hear about this stuff, but I feel that I should remind you at least once a year. This way, you, your children, and grandchildren will be not be totally unprepared for what is bound to happen sooner or later. Sure... you may be one of those people who are waiting around for the next "free energy" device to come around that will save us all from the mean old "big oil" people. Well...

Let me give you just one small example why most of you don't care about the oil problem or do not even acknowledge that it exists.... a friend of mine once saved up all his receipts for a whole year so he could calculate the "total" amount of taxes he was paying for that year. I'm talking about everything... sales tax, car tag tax, school taxes, property taxes, gas taxes, capital gains taxes, income taxes, etc. He figured he was paying about 50% of his annual income out in taxes of various kinds. 50% !!!!!!!!!! 

(Today in 2018, it's probably much higher. Hell, every time I turn around they are raising my property tax!) .

Most of you have been "conditioned" into thinking that is normal. If last week you were only paying 30% and then "they" bumped it up to 50% overnight, this country would tar and feather ever politician in sight. But by just increasing your taxes by 1% every year over a 40 year period, waaaaalaaaaaa.... the politicians have their money and without much of a fuss at all. Well the same kind of thing is going on with oil prices. Not to mention that a good chunk of the price of gas at the pump is taxes. Anyways - enough about taxes...     

The truth is, an alternative form of energy may or may not be discovered in time for us to avoid all the problems that a rising demand and decreasing supply of fossil fuels is sure to bring into this world. The following article is a great synopsis of those problems and their causes. I highly encourage you to read it. It is written from the perspective of a company that sells investments in oil, but you can't deny the truths found in the article. If you want more information about Peak Oil, I urge you to read "The Oil Age is Over". Please read the article below so that you will at least be knowledgable about what may happen soon...

Do you eat, drink, and sleep fossil fuels?

The world is sprinting to keep pace with its demand for oil. Ten years ago—even five years ago—this was not true. But today major oil producers report they are sucking out of the ground every drop of oil they can and rushing it to market as soon as they can, yet prices remain well above historic norms.

Why? Could it be that there are deep, structural changes afoot throughout the world economy driving energy prices higher across the board?

We believe there are, and that you need to know what they are and how they will impact your net worth in the next year, five and ten years, and beyond.

You may have already read my accompanying article on the Peak Oil phenomenon, "Man's Quest for Crude: Here Comes the Hard Part." If you haven't yet read it I urge you download it now from this site and read it first. Peak Oil is by far the most important energy-related story of this century and no investor should remain in the dark about it.

But the soon-to-come peak in world oil production is only half of the story: the supply half. The other half of the story is demand. Obviously, peaking world oil production is less of a problem if demand is peaking as well. But it isn't. Far from it, demand is surging, and from corners of the globe which previously never imported a drop of oil.

The world oil market is becoming overwhelmed with demand from formerly moribund third-world economies which are leaping up to first-world status in a single generation. This sea change in the world economy is the most significant economic development in our lifetimes, and it will profoundly affect the world, and thus, your investment portfolio.

The only question is whether these massive changes will affect you negatively or positively. And of course, only you can make that choice. But first you'll have to educate yourself as to what is happening and why, and why we are far closer to the beginning of this "megatrend" then the end.

The World's Addiction to Oil Intensifies

Just 15 years ago, nearly a third of the world's population was trapped in totalitarian systems which offered almost no economic freedom or opportunity.

Most citizens of these benighted, depressed nations were not free to start businesses, to trade, to earn a significant income or better their material lives. They lived a Spartan, hand-to-mouth existence, according to the dictates of the State.

Then two political earthquakes rocked Europe and Asia, more or less at the same time. First, China embraced its own brand of free-market economics. Then the communist regime of the Soviet Union and its European satellites evaporated.

The shockwaves from these twin earthquakes are just beginning to be fully felt, and its epicenter is the world oil market.

The new participation of the former "second-world" communist nations in "first world" international trade, along with the economic awakening of India, has introduced over two billion new consumers and producers to the world economy—all within the span of a teenager's lifetime.

Where rice paddies and desolate, empty plains once stood, thousands of massive factories have risen, manufacturing everything from toys to computers to clothing. Many thousands more are being built now.

Question: How are all those new factories being powered? And how will their millions of tons of products be transported, and where?

We know the answer. It's all being made possible by oil. We'll look closely at China later, but consider for the moment that because that nation doesn't produce nearly enough electricity to meet its new needs, many of its factories are powered by massive on-site generators. Diesel generators.

And after products from these factories are assembled, who buys them? Wholesalers, who sell to distributors, who sell to retailers, who sell to consumers. Eight thousand miles away.

How do they get there? By diesel trains, diesel trucks, and diesel-powered container ships.

Simply put, the new world economy is greased, paved, constructed and powered by fossil fuels. So it shouldn't surprise us that:

* According to the International Energy Agency, 2004 world oil demand is increasing by a higher rate than any year since 1988;
* The world is now burning a record 80 million barrels of crude oil every day; almost 30 billion barrels just this year. To put this in perspective, in 2004 we will burn nearly eight billion barrels more oil than the entire U.S. proven oil reserve;
* The Energy Information Administration projects that, if current trends continue, by 2025 worldwide oil demand will exceed 120 million barrels per day, from a world oil production system which is, according to many experts, in the process of peaking.
 
Why is this happening? Aren't home appliances and electronics and machines becoming more energy-efficient? Why is world oil demand growth so far outpacing its population growth?

Energy Is Prosperity

To begin to answer that question we need look no further than our own shores. America is the undisputed king of energy consumption. We are home to less than five percent of the world's population, yet we consume about 25 percent of the world's total produced energy. Is that because we are a bad or particularly wasteful people? No. It is because we are a particularly prosperous people.

Wealth creation and energy usage are two sides of the same coin. In the modern world you cannot have one without the other; energy is, well, the energy modern economies use to create products of value for consumers to buy. No energy, no wealth. It's that simple. 

Paul Roberts, in his excellent work The End of Oil explains:

"Every act of economic activity is also an act of energy consumption. The hamburger I order from the takeout window is the ultimate, concrete form of demand in a cascade of individual energy decisions and transactions and uses: from the diesel in the tractor that tilled the feed grain to the electricity that powered the lights in the slaughterhouse to the gas that fired the restaurant grill (and this calculation, of course, does not include French fries)…

Historically, the more economically active we humans have been, the more energy we have used to create it with. It is an endless cycle: more wealth leads to more purchases; more purchases increase demand for products, which in turn calls for more factories, more raw materials, and more trips by truck and train from factory to warehouse and from warehouse to the Wal-Mart and the Pottery Barn. The entire global economy is like a huge machine, steadily converting energy into wealth.

One can trace a country's material advancement by its growing appetite for energy, and by its success at feeding that appetite. The richest nations use great quantities of energy and do so with stunning sophistication and startling obliviousness: beyond occasional complaints about gasoline prices or the electric bill, the vast majority of Americans and Europeans are no more aware of using energy than they are of breathing air."

That's America. Rich and energy-hungry. But see, in a modern economy, to be rich is to be energy hungry. You can't be one without being the other. Commentators sometimes opine in newspapers and political talk shows that Americans use too much of the world's oil; to them we are oil gluttons, and we need to have our wrists slapped for what they believe is our selfishness and greed.

They are right, America is one big oil sponge; the numbers prove it. But they are wrong to think we can change our relationship to energy without at the same time changing our relationship to the notion of prosperity itself. That is, America—or any wealthy, developed nation—can only significantly reduce its energy consumption by significantly reducing its level of prosperity. What politician do you know will be urging that upon his constituents any time soon?

If you still doubt that energy and prosperity are inexorably linked, consider this fact: the four most prosperous nations in the world—the U.S., Japan, Germany and South Korea—have the four highest rates of per capita energy usage. This can't be mere coincidence.

And where these great economic powers are, developing nations like China and India want to be. So for us to understand where the rest of the world is going to be heading the next two decades, we only need look at where we are now, and how our own people aspire to live.

The American Dream Redefined (Again)

Definitions of what it means to "prosper" change over time. One hundred years ago, a family with gas lighting in their home was considered prosperous. Fifty years later, a family with a small black-and-white television was considered prosperous. Today, even the poorest Americans have far surpassed these former definitions of "prosperity."

So what does it mean to prosper in America today? Let's look at just two consumer choices, which happen to be the most important purchases for most households: homes and cars.

Exactly what constitutes a "nice home" has been expanding relentlessly over the past 25 years or so. While new homes are undeniably more energy-efficient per square foot than homes of a generation ago, there are more square feet in the average home than there was a generation ago. In 1970 the average size of a new single-family home in the U.S was 1,500 square feet. Today it is over 2,200 square feet—a 50 percent increase in living space.

The latest trend in home development—the mini-mansion—is the quintessence of this trend. Homes are built to their legal maximum per lot size, with bathrooms the size of what bedrooms used to be. Vaulted ceilings require much more air space to be heated. Jacuzzi tubs, gourmet kitchens with high-btu professional ranges and oversized Sub-zero refrigerators, and massive, floor-to-ceiling, heat-dissipating windows come standard. And of course, each model includes a three-car garage.

And increasingly, what prospering Americans are rolling into those garages are light-duty trucks and large SUVs, which have been promoted by Detroit's automakers precisely because they are excluded from federal fuel-efficiency standards. SUVs and light trucks now account for half of all new vehicle sales in the U.S.

Naturally, these hulking vehicles, some of which are 6000 pounds or greater in weight—roughly three times that of an economy car—sometimes achieve real-world gas mileage no higher than the high single digits.

The U.S. government reports that the average fuel economy of light-duty vehicles (including cars, SUVs, and minivans) is six percent better than it was in 1987. At the same time, however, average horsepower has increased 76 percent, and average vehicle weight is up 26 percent. If horsepower and weight had not increased, light-duty vehicles would consume 58 percent less fuel today, not merely six percent less.

What's more, the tract developments their owners live in are located further and further from the cities where they work; average commutes have steadily risen for the past two generations, and along with it, the average number of driving miles per person per year.

Have you noticed? All of these consumer choices, choices that issue forth from an ever-increasing prosperity, require just one thing (besides money) to make them possible: energy. Electricity to power the home (usually generated through the burning of fossil fuels), heating oil or natural gas to heat the home, gasoline to power the SUV ever more miles per year.

Perhaps these trends in American consumption explain why, even with a contracting economy in 2001-2003, U.S. oil demand increased three percent each of those three years. Even recessions can no longer be counted on to reduce our thirst for oil!

More important to this discussion, however, is what these rising expectations among American consumers mean for the developing world. Is the desire for more electronic gadgets, larger-capacity home appliances and bigger homes and cars only an American phenomenon? Or is it somehow hardwired into the circuits of consumers in a modern developing economy? For the answer to that question, there is no better place to look than China.

Napoleon Didn't Know How Right He Was

After a lifetime of surveying the world scene (and conquering much of it), Napoleon Bonaparte observed, "When China awakens, she will shake the world."

China is not only awake, she is roaring. And the world, especially the world oil market, is indeed shaking.

"China is having an incredible influence on energy flows, not just in Asia but on a worldwide basis, said Peter Davies recently, British Petroleum's chief economist. "The whole center of gravity of the world energy market is changing."

In China we have a truly remarkable story of our times. Imagine, a nation of famously shrewd people, who comprise roughly one-fifth of the world's total population, all trying to get rich, all at once. When something like that happens, these are the kinds of things you see:

* China's real gross domestic product (GDP) grew at a rate of 9 percent in 2003, on top of 8.0 percent growth in 2002, according to the Energy Information Agency.
* China's real GDP growth is forecast to reach just shy of 10 percent for 2004, a record pace for a major economy.
* China's exports increased by over one-third in 2003 alone.
* According to its State Statistical Bureau, Chinese factories are producing 19 percent more goods than last year.
* Exxon/Mobil economists project that the world economy will grow an average of 2.8 percent a year through 2020, but China will more than double that growth every year.
* We could go on and on like this; the numbers are simply astounding. It is as if the entire country of China is working three shifts a day in a nationwide effort to slingshot a feudal, almost medieval system into a modern First World economy.

Now, we know the Chinese are not working this hard out of altruism. Their motivation is simple: they want the same stuff you have.

In 1985, seven percent of all Chinese homes had refrigerators. Today, 75 percent do. In that same time period, television ownership rose from 17 percent to 86 percent. Fifty times more homes are cooled by air conditioners than was the case twenty years ago.

Is it any wonder the Chinese government estimates the nation needs to build sixty electric plants every year for the next ten years, just to keep up with the demand?

But all the electricity in China won't power the granddaddy of consumer goodies: the automobile. China is falling in love with the automobile. What the 1920's were to America, this decade is for China. Everyone wants a car. And more and more Chinese are realizing their lifelong dream of owning one.

Have you ever attended an auto show? Have you ever met anyone who has attended an auto show? Do you even know when they are held, and where?

The Chinese know. Over half a million of them crowded into the most recent Beijing International Auto Show. The throngs were so massive, eyewitnesses report that during peak times attendees were swept along in waves, unable to control their individual movements.

In 1984, the first private vehicle rolled tentatively into the heart of Beijing, parting a sea of bicycles in its path. Today, five concentric beltways encircle the city, yet a 15-minute drive will often take an hour or more. Beijing now boasts over 1.5 million car owners.

None of this has occurred by accident. The Chinese government planned it all along; or at least since the mid-1980's. That was the time when China decided to revive itself economically. And it realized the nation couldn't become a real modern economy without cars to buy, and cars to build.

So they proclaimed auto manufacturing a "pillar" industry, and set a very ambitious production target of one million vehicles per year by year 2000. They were off by two years; Chinese automakers didn't hit the one million mark until 2002, with sales growing by 20 percent per year.

Yet for all this growth, fewer than eight in a thousand own a car today. But a third of urban Chinese own driver's licenses, and three-quarters report they plan to buy a car in the next five years.

General Motors, which has invested heavily in joint Chinese ventures, estimates that by the end of this decade China will buy one out of every five cars built worldwide—twice that of the U.S. This has led some researchers to predict that, at current growth rates, by 2015 China could be fueling as many as 100 million private vehicles.

But how? Where is all the gasoline to power all these cars going to come from? Why, from oil, of course. Where will the oil come from? We'll get to that in a second, but one thing is certain: it won't be coming from China.

China's oil production system has been stuck at 3.5 million barrels per day for years. Despite billions of dollars invested in exploration and development, Chinese oil production seems to have reached a peak, and is showing signs of decline.

The demand and production lines crossed in 1993; for the first time, domestic demand outstripped domestic production, and China became an oil importer. It's been importing more oil every year, to the point that now, China imports nearly twice the amount of oil it produces, placing unprecedented pressure on world prices.

That's why in 2003, China surpassed Japan as the second-largest world petroleum user, with a total demand of over 5.5 billion barrels a day—just behind the U.S.

Now, let's put China's oil demand growth into perspective. At present rates of growth, by the end of this decade China will be consuming more than nine million barrels of oil a day, exceeding the entire oil output of Saudi Arabia, the world's largest producer.

To put this into further perspective, let's compare mainland China with its nearby cousin, Taiwan. The two are similar in almost every way, except Taiwan got a long head start over mainland China in the industrialization game. Today, China consumes about 1.5 barrels of oil per person per year; Taiwan, 12.5 barrels.

Now, suppose China just reaches half of Taiwan's level of consumption. That would mean a total demand of about 20 million barrels of oil per day—twice Saudi Arabia's daily output. Should China someday equal Taiwan's per capita usage, they would require the entire oil output of five Saudi Arabias.

Just for laughs, let's ask, what if China reaches its goal of attaining American standards of wealth? China would gulp down the total daily oil output of ten Saudi Arabias.

And we haven't even begun to talk about India, which is tracking just behind China in oil demand growth, along with the other "Asian tiger" nations. Simply put, worldwide oil demand growth is skyrocketing, and worldwide oil production will be lucky to finish the year flat. No expert foresees these massive, historic trends reversing themselves any time soon.

Given these facts, can you see any scenario in the years ahead which would not lead to dramatically higher oil demand, and thus, dramatically higher oil prices?

Most importantly, as an investor, can you see any scenario where oil would not be a very smart commodity to own and produce in the years ahead?

Crude Oil: Your Dinner is Soaking in it!

Earlier we talked about America's disproportionate consumption of oil relative to our population. As we said, that is very much a function of our prosperity.

But there's another reason why we use so much of the world's oil: we feed so many of the world's people.

America is the world's pantry of last resort. We're the place other nations go when they can't grow enough grain or other foodstuffs to feed their people. We are by far the world's largest food commodity exporter and have been for many years.

Now, if you're over the age of 35 you probably remember hearing from your mother at dinnertime, "Clean your plate, there are children starving in (name your country—India, China…)"

Have you noticed? Moms don't say that to their kids today. Why? Simply because it isn't true anymore; children around the world eat far better than they did years ago. There are starving and hungry children, of course—millions of them—but they aren't starving because there's not enough food to go around; in most cases they're starving because their corrupt governments are stealing it as it comes into the country.

You may be aware that there has been a dramatic increase in food production over the past 40 years, even though less farmland is cultivated than ever before. How is this possible? By a dramatic increase in yields per acre planted. How has that been made possible? You guessed it: fossil fuels.

Welcome to the Green Revolution.

The so-called Green Revolution is really a transformation of agriculture from a chance endeavor dependent upon the vicissitudes of rain, insects and disease, to a mechanized industry where every possible variable is controlled and managed by biotechnology and chemical science.

And, measured by sheer volume of output, a great success it has been. Total world grain production has increased 250 percent in the last 35 years. Though much of those gains have come from new hybrid plant varieties, credit is equally shared by agriculture's dramatic increase in natural gas usage (for fertilizer) and oil usage (for pesticides and machinery).

The Green Revolution increased energy flow to agriculture by an average of 50 times traditional agriculture. To give you some kind of idea how much fuel we are talking about:

* Agriculture accounts for 17 percent of all the energy used in the U.S.
* 400 gallons of oil equivalents are expended annually to feed each American.
* A pound of beef requires three-quarters of a gallon of oil to produce; a single steer requires almost 300 gallons.
* Each acre of land requires an average of 6.4 barrels of oil to cultivate.
* As a result, the energy equivalent of 96 billion barrels of oil is consumed in the growing of our food, every year.

Simply put, these historic yields in food production have come at a price. That price is the consumption of vastly larger amounts of oil to feed a rapidly growing world.

So, here's the question we need to ask ourselves: If oil demand, and thus prices, were to go down, who would volunteer to stop eating? For oil consumption in agriculture to drop, food production must drop, which means someone, somewhere is going to have to stop eating, or start eating a lot less than they are now. Not many people are going to do this voluntarily.

Which means, then, that ever-higher oil consumption is virtually guaranteed, if no other reason than that the population of the world keeps growing and ever-more amounts of petroleum are needed to feed them.

As investors, we are rarely afforded the opportunity to speculate on something so certain as population growth and human hunger. But oil, as we've seen, lies at the intersection of these global realities, and as such will remain a commodity in the highest demand.

Oil: The Commodity of the 21st Century.

We hope that the preceding discussion has shed new light on why we all keep reading and hearing about higher oil prices in the news. Oil is trending higher for a reason. Or, actually, several reasons.

As an investor, I suggest you ask yourself: Are those reasons likely to recede any time in the foreseeable future? Is there any scenario you can imagine which would stop the Chinese and India economic juggernaut in its tracks? Any scenario you can imagine that would lead Americans to want smaller houses? Any scenario you can imagine that would lead people around the world to eat less?

If not, then you've come to the right place. At Mammoth Resource Partners, we've dedicated ourselves completely to helping investors appreciate the full scope of oil's potential as an investment. We are convinced that oil is the commodity of the 21st Century, and we want you to be fully informed of the major trends world oil prices which will so greatly impact your life, and your investment portfolio—for good or ill.

That's why we're always here to answer your questions about Peak Oil, terrorism & oil, or world oil demand. We welcome your questions, your concerns, your insights. And we wish you every success as you explore the exciting potential of investing at the dawn of the Century of Oil.


Sincerely,

Bill Anderson