It Isn't Too Late to Buy Oil

When my in-laws traded in their car for a Prius a few years ago, I initially wondered if they were trying to save money on gas or if my retired father in-law simply wanted a new toy.

I'm a sucker for gadgets and new technology too, so I certainly couldn't blame him if he did. But by 2008 it didn't matter if gadget lust had driven the trade, because they were saving $100 a month or more on gas.

Consuming more and more
Of course, oil and gas are quite a bit cheaper now than they were last summer -- when the world struggled to cope with $147-a-barrel oil. My in-laws aren't saving nearly as much now, but I suspect they'll continue to be happy with their trade in. Toyota (NYSE: TM  ) should be pleased with sales of the Prius, because as the world recovers from the recession in oil consumption, emerging markets should once again put pressure on global oil supply to grow.

The table below shows just how big a factor consumption growth in emerging markets has been in the last 10 years -- and how little developed market consumption has changed.

Oil Consumption – Millions of Barrels/Day

Country

1998 Consumption

2008 Consumption

Rank

CAGR

U.S.

18.9

19.4

1

0.3%

China

4.1

8.0

2

6.9%

India

1.8

2.9

5

4.9%

Germany

2.9

2.6

6

-1.1%

Brazil

2.1

2.5

7

1.8%

Saudi Arabia

1.4

2.4

10

5.5%

World

74.1

85.4

N/A

1.4%

Source: Energy Information Agency actual and forecast data; CAGR = compound annual growth rate.

Regardless of what happens to U.S. consumption, it's the emerging markets that are creating the need for additional supply. And China's consumption clearly stands out from the pack.

Expect more of the same from China
The Energy Information Agency expects China's consumption in 2009 to be flat, largely because the recession has pushed industrial use down. With most of its GDP tied to exports, an industrial recovery will take time. But transportation consumption is another story, as China continues to sell autos at a breakneck pace. Last month another 812,000 autos were sold in China, and the country is on pace to sell more than 10 million autos this year. That's on top of last year's 9.3 million autos sold, and higher than 2009 sales expectations for the U.S.

Volkswagen has announced that it expects its 2009 sales in China to exceed its sales in Germany for the first time. Volkswagen's probably not alone either, at least not for long, because only 20 out of 1,000 people have cars in China. That compares to 800 or so per 1,000 people in the U.S. With such little consumption per capita, there is plenty of room for additional growth over the next five to 10 years. As more cars hit the road, China's oil consumption will continue to increase.

That's good news, not just for PetroChina (NYSE: PTR  ) , but for multinationals like ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and BP (NYSE: BP  ) , because they need steady cash flows to support the development of new fields. And it's even better news for Suncor (NYSE: SU  ) , Petrobras (NYSE: PBR  ) , and other firms with substantial oil sands and deep-sea assets, because these sources are substantially more expensive to develop.

All this means that despite the recession and the recent run-up in oil stocks, it's not too late to buy oil, because the long-term trends for higher demand are still in place.

China set to grow and benefit too
For its part, China needs to reduce its reliance on exports and deal with the inevitable cultural and political changes that come with economic growth and greater freedom. But because of its substantial currency reserves and infrastructure spending over the past decade, it is in a position to continue supporting the fastest economic growth story in recent history.

China's potential growth is one reason our Motley Fool Global Gains team is heading back to the country this July to meet with some promising companies we've identified through our research. If you're interesting in hearing about what we find, you can sign up to receive all of our free real-time dispatches from the field simply by providing your email address in the box below.

Nathan Parmelee is co-advisor of Motley Fool Global Gains, whose twitter feed you can follow at http://twitter.com/TMFGlobalGains. He owns a few energy companies, but none of the companies mentioned in this article. Petrobras is an Income Investor recommendation. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 01, 2009, at 5:50 PM, plange01 wrote:

    to early for oil.with the us sinking deeper into a depression oil consumption is dropping.recent activity in oil is mostly hedge funds looking to take advantage of summer drivers and other people following them.oil prices will fall bach to their lowest levels of the year soon...

  • Report this Comment On July 01, 2009, at 7:07 PM, xetn wrote:

    Beware of the auto sales figures for China, because a lot of those sales are based on China's consumer stimulus program which provides large credits for people that trade in their existing car for a new one. This means that there is really not a lot of growth in the number of cars, just in sales. (A lot of the old cars are being recycled, not resold).

    This is also the case for certain major appliances.

  • Report this Comment On July 02, 2009, at 7:43 AM, jsl4980 wrote:

    Did you just copy and paste an article from the last oil bubble?

  • Report this Comment On July 10, 2009, at 12:07 PM, stockjock43 wrote:

    your right.....its was and is way too early for new money. Oilk stocks going at least 10% lower even from today 58 oil

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