January 25, 2007
Thursday

President George W. Bush is not alone in promising policies that would slash oil demand - the European Union and China have also set ambitious efficiency targets.

And that concerted action by the world's three leading energy consumers could put a damper on demand for crude oil and downward pressure on prices over the long term.

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While Bush talks about ending dependency on imported oil from the Middle East, Canada is the largest single supplier to the United States - exporting as much crude to the U.S. as the Persian Gulf countries combined. And it is the high-cost producers, such as Alberta's oil sands companies, that would be hit hardest by weak demand and soft prices.

"If I was a producer, I would be really, really concerned," said Paul Ting, a long-time Wall Street energy analyst who now runs his own consultancy. "There's not going to be demand destruction, but there will be erosion, and that is going to be a big problem for them."

In his State of the Union address this week, Bush - who last year said his country was dangerously addicted to foreign oil - proposed policies that, he said, would reduce gasoline demand by 20 percent from projected levels in 10 years.

While critics questioned whether the target will be achieved, the pledge was nonetheless seen as significant, coming as it did from a Republican President who has been regarded as an ally of the industry and accompanied by a determination of a Democratic-controlled Congress to act. Equally important is that the long-time climate-change skeptic is proposing measures to promote energy efficiency and alternative fuels in part as a way of reducing greenhouse gas emissions.

Analysts don't expect the kind of demand collapse that occurred after the Organization of Petroleum Exporting Countries drove up prices in the 1970s, but they say leading consumer countries are committed to improving their energy efficiency and reducing their reliance on gasoline.

Consuming countries have three reasons for attempting to reduce their use of crude oil and its products: prices are volatile and remain high, even after sliding from the record $78 a barrel last summer; environmental concerns such as climate change are driving the push for substitutes to fossil fuels; and consumers, notably in the United States, worry about security of supply from unstable, even hostile, producing countries.

Producers have been getting a clear-eyed view of what can happen to crude prices when demand softens, as it has since mid-2006, sending prices to a recent low of $50 per barrel.

The International Energy Agency - the developed world's energy watchdog - reported last week that oil consumption among its members fell 0.6 percent in 2006, the first significant decline since the 1980s. Spurred by high pump prices and warm weather, U.S. oil demand was 0.9 percent lower in December compared with the previous year.

While high prices and weather take their toll, governments are entering the marketplace in a fashion not seen since the oil crisis of 1970s.

Ting noted that China has set a target of improving the energy efficiency of its economy by 20 percent over five years, with further improvements after that. He said growth in Chinese oil demand slowed from double-digit rates at the beginning of last year to about 4 percent by the end of the year - and that's in an economy where product prices are controlled and did not experience the runups that North America did.

"China will still see demand growth, but it won't be anything like the rates we experienced in the past few years," he said.

The European Union is even more aggressive, pledging to reduce its energy consumption by 20 percent below 1990 levels by 2020. European governments are more committed to meeting greenhouse gas emissions under the Kyoto Protocol than are their North American counterparts. They are also increasingly uncomfortable about their reliance on Russia and the Middle East for their energy security.

Energy economist Peter Tertzakian of Calgary-based ARC Financial Corp. said Bush's speech marked an important milepost in the long-term decline in the fossil fuel economy to a system that is both more efficient and more varied in supply sources.

"This is more validation that we are in the early phase of energy transition," Tertzakian said. "We're approaching the breaking point at which the way energy is supplied and the way energy is demanded is no longer sustainable."

He said crude markets will still experience short-term swings, and prices could spike sharply higher if there is further geopolitical instability in the Mideast. But over the longer term, he said, the world is going to wean itself off its oil addiction.

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