FIRST came the collapse of the Berlin Wall in 1989 followed by the reunification of Germany and the integration of Eastern Europe in general into the Western way of running the world.
As these hundreds of millions poor eastern Europeans and even poorer Chinese migrant workers found better jobs then, of course, consumption of everything made from oil received a tremendous boost.
Simultaneously – and this is crucial to our understanding of what is happening today in oil and other commodities markets – waves of strong demand for all things manufactured in eastern Europe and especially in China surged out of the US, Canada and Europe. The reason was that the richest, and also crucially the biggest, middle class demographic cohort in the history of the entire world – the Babyboomers – were coming of age. They had moved out of their early twenties in the 1980s and had thus finished their education, found jobs and were starting families.
So they needed lots of things made from oil – for example, the first generation of disposable nappies. And of course they needed, and also could comfortably afford, automobiles to ferry their kids backwards and forwards to kindergartens. And the fact that the kids had to be placed in kindergartens or nursery schools told us that something else absolutely crucial about both the quantity of demand for oil and its affordability: These were dual-income households as women were working as well. Like the Babyboomer generation, the introduction of hundreds of millions of women into the Western workforce provided another enormous “one off” boost to the global economy.
Then, as sadly happens to all of us, the Babyboomers got older. But for many years this wasn’t at all a bad thing because with greater age came both the ability to buy greater quantities of oil, and all the things made from oil – and an eagerness to buy an ever-higher quality of goods made from oil.
This virtuous march of time reached its zenith from around the mid-1990s to the middle of the first decade of this century. During that period, the Babyboomers were reaching the peaks of their middle class professional careers, and so they were earning lots and lots of money – more money by sheer quantity than any demographic cohort in the history of the world had ever earned, adjusted for inflation.
As we moved into the 2000s another very important event took place: The Babyboomers’ kids grew up and became independent. For the first time for many years these super-rich middle class people didn’t have to worry about paying university and college and fees, and so the statement, “heh, honey I’ve always really wanted a Porsche,” was for the first time met with the reply, “Sure, go out and get one”.
But then things started to go wrong. From the middle of the first decade of this century, the Babyboomers began to retire - and they are not being replaced, and simply cannot be replaced for at least 25 years.
Quite suddenly, the Babyboomers didn’t have as much money as before because they were living on pensions. Not all of them had saved prudently enough for their retirements, and even hose who had stashed away lots of money were badly hit by the bursting of the dot com stock market bubble. Their savings were then hit in later years by the US sub-prime crisis and the end of the China commodities bubble.
Plus, it is an inescapable fact – all the evidence points this way – that people spend less when they get older. They already own most of us what they need. Buying a two-seater expensive sports car therefore ends up being seen as silly, unnecessary – and also an uncomfortable fit for ageing bodies.
A problem is that many people who analyse oil and other commodities markets were still very young, if they were born at all, in 1989. Or if they are of the right vintage, they have simply forgotten that world history is capable of major shifts in direction, as the collapse in the Berlin Wall so clearly tells us.
Another issue is that many of the other people who study oil markets don’t even think about history, as they were never taught history beyond the basic level at school. They are instead purely statisticians, geologists and engineers etc. Here is an interesting question for you: How many oil and chemicals companies make it mandatory that all of their oil analysts have studied history?
This crucial lack of understanding hasn’t led to a shortage of opinions on the “demand” side of the oil story. The problem has instead been that these opinions have never stood up to serious analysis because the people expressing these opinions haven’t received the proper direction or training.
Would you set loose somebody who is only a history graduate on a survey of recoverable reserves at an oil field? Of course not. So why set someone loose on studying demand who not only doesn’t understand history, but also has little grasp of all the social, political and environmental factors that are reshaping the world?
Let me give you just three examples of demand side opinions about oil, and all the things made from oil, that have never stood up to serious analysis:
- OK, the Babyboomers are retiring in record numbers, but China and the rest of the emerging world is becoming middle class. Hundreds of millions more middle class in the emerging world will easily replace this lost demand from the Babyboomers.
- The US economy is back, thanks to the shale-oil and gas booms and the “trickle down” effect of the Fed’s stimulus policies. So the American consumer will yet again ride to the rescue of global oil demand.
- So what if air pollution is killing 1.6 million people in China every year? Who cares if there is a new global consensus on global warming? These are just concerns for a minority of “tree huggers”, and have nothing to do with the global oil industry.
This is why we are where we are today: Too many people expecting that supply side cutbacks by themselves guarantee a significant and sustainable recovery in oil prices over the next few years – and that this recovery will by itself indicate a return to a healthy global economy.
Sure, there are many counterarguments out there to what I have detailed above. But they have to be informed, carefully thought-through arguments as the thinking on oil demand that got us into this mess in the first place has clearly failed. Disagree? Then why was it that most people missed last year’s oil-price collapse?