Best Time To Invest In Building Pipelines Might Be The Next Few Years

Few commodities illustrate the macroeconomic realities of supply and demand as well as oil or natural gas. Even OPEC, which controls nearly 40% of the world's oil supply, unhappily finds itself on the tail that is wagged by demand.

The recent global economic downturn has predictably affected oil and gas demand and demonstrated to OPEC as well as producers that demand is not perpetually elastic.

Decreased demand is likely to continue at least through 2009. Decreases in demand inevitably affect E&P investment, but downward demand trends have another effect that is not often considered: reduced investment in infrastructure, particularly construction of new pipelines.

Work on new natural gas infrastructure will continue through 2009 and beyond, if only because many dedicated projects commenced before demand decreased. On the other hand, work on new oil E&P or pipeline projects has already slowed, and that may take longer to return. For a number of reasons, however, the next few years may offer the best opportunity in recent memory, and for the foreseeable future, to make new investments in pipeline infrastructure.

Changing Demand

The demand for energy generally, and oil and gas specifically, has increased markedly over the past decade. In part, this is due to rapid growth in the economies of China and India; the economic booms in those countries in recent years helped create the first “demand” driven energy shock, creating rapidly rising and record prices per barrel. Oil consumption in China has more than tripled since 1980 and has doubled in India since 1992. India and China are predicted to approach U.S. oil consumption by 2030, if not before.

As demand has risen over the past decade, so has the price of oil. But when the price of oil reached its demand threshold in the U.S. in 2008, consumption behavior changed dramatically and quickly. As the biggest consumer of oil worldwide - at 21-22 million barrels per day (or roughly 25% of the world oil supply) - it was surprising to many observers just how quickly the American public modified its energy consumption habits when faced with higher oil prices.

Perhaps even more surprising was how quickly the global demand for energy changed in 2008. For the first time in at least 25 years, global demand for oil decreased in 2008. That decrease was driven by the financial decline of Wall Street, as its global impacts became manifest. We are now seeing the effects of the financial sector’s collapse, and that event continues to influence energy demand globally, even while the price of oil has dropped significantly.

These demand trends tend to mask another development that will continue to affect energy usage in the U.S. in the coming decades: changing demographics across the continental U.S. If oil and gas pipeline planners were to sit down today to draw ideal transportation routes to end users, the resulting infrastructure grid would undoubtedly look quite different than what currently exists, given the distribution of population growth and changes in industrial sector use since the bulk of our current infrastructure was built in the 1950s, ’60s and’ 70s.