As someone who is invested in the oil space via ownership stakes in BP, Exxon Mobil and Royal Dutch Shell, I am not too concerned with the price of oil dipping below $50 in recent weeks. When I took stakes in these companies, I realised that the price of oil will not double overnight. I knew that it will take a considerable amount of time for oil prices to recover. But when the recovery starts, I expect prices to shoot higher and that is why I am optimistic about the oil industry long-term. Oil has a huge tailwind in the form of the emerging global middle class.
Global Prosperity and the Price of Oil
To understand how increased global prosperity and the emerging middle class will affect oil, we need to look at nations that are already developed. Nations that have a high standard of living and industrialised economies.
Today, the U.S. is the largest consumer of oil on the planet. The U.S. uses about 7.2 billion barrels per year, or nearly 20 million barrels per day.
Another ‘first world’ country , Japan, also uses copious amounts of oil, around 1.8 billion barrels per year or nearly 5 million barrels of oil per day.
Together, these two countries alone consume 25% of all oil produced globally. Yet when you zoom out you realise that the total population of both countries is only around 450 million people – around 6% of the world’s population.
Meanwhile, China has a population of nearly 1.4 billion. It uses 4 billion barrels of oil per year – about 11 million barrels per day. In other words, the U.S. – with a population about one-fifth the size of China – consumes almost two times more oil. And this is where it gets interesting. China is in the middle of another industrial revolution. Poverty is decreasing, and the middle class is growing. The standard of living is on the rise. The Chinese are driving cars and scooters, watching TV, using a lot of electricity, and making a lot of stuff. By next year, China is set to overtake the U.S. as the world’s largest importer of crude oil.
The story of china is truly amazing.China’s economy has grown 900% since 1999. Over that period, it has grown to be the world’s second-largest economy at more than $10 trillion. Instead of bicycles crowding the streets, the Chinese are driving cars and scooters. Vehicle sales have exploded, and demand for oil has nearly tripled in the last 20 years alone. And it is still growing.
And if you think China is promising, you ain’t seen nothing yet. For as big of a catalyst as China will be for oil prices, India has even more potential to move the needle. There are around 1.3 billion people in India – around three times the combined population of the U.S. and Japan. India uses 1.5 billion barrels of oil per year, or about 4.1 million barrels per day.
That’s just a fraction of the oil used in China. But India is expected to add another 241 million “people of working age” by 2030. And you can bet that most of them will be driving cars, watching TV, and making stuff. Soon, India will pass China to become the world’s highest-populated country. Because of this India is expected to be the fastest-growing consumer of crude oil in the world through 2040, adding 6 million barrels a day of demand. India’s drive for higher oil demand is as a result of (A) a rise in per capita oil consumption reflected in the rising motorisation of the Indian economy, (B) an enormous road construction programme amounting to 30 kilometres per day and (C) a push toward increasing the share of manufacturing in GDP.
China and India’s combined population is 2.7 billion people. What happens when 2.7 billion people begin to use oil at the rate of the U.S. and Japan?
Today, Japan and the U.S. use about 19 barrels of oil per person per year. Even if China and India consume just five barrels of oil per person per year by 2030, that amounts to more than 13 billion barrels of oil – increasing world demand by more than 9 billion barrels per year. See why I think oil demand will rocket upwards into the future?
As an investor in the giant integrated oil majors, I am more than happy to wait out and let this scenario of long term increased demand for oil play out. In the mean time, I will keep collecting the £450+ in annual dividend income BP, Exxon and Shell send my way.