2010’s most important statistic

In recent weeks we’ve read and heard many stories about the person of the year, the athlete of the year, the newsmaker of the year, etc. Here’s something a little different. It’s my nomination for the statistic of the year.

There’s no contest in my mind. The most important number for 2010 is 87.4 million.

Doesn’t ring a bell? I’m not surprised. It’s a rather obscure statistic but its implications are enormous. It’s the amount of oil used every day, according to the Paris-based International Energy Agency (IEA). Their projection for the final 2010 number was 87.4 million barrels a day (mb/d), an all-time record.

And the IEA says we’ll consume even more this year. The Agency, which acts as an energy policy advisor to 28 member countries, predicts that demand will increase another 1.6 per cent in 2011 to 88.8 mb/d.

Why is that so significant? Many reasons, starting with the outlook for the world economy in 2011. As a National Bank commentary noted, global oil demand has recovered to pre-recession levels in only three years. That’s a remarkably fast rebound; after the recession of the 1980s it took 10 years for oil consumption to reach a new high.

Those numbers suggest that the global recovery is much stronger than is generally recognized and that fears of a double-dip recession are overblown. While it’s important not to read too much into any single statistic, the fact that more oil is being consumed than ever before is evidence that the world is snapping back from the worst downturn since the Great Depression and that 2011 may be a better year than many people expect.

Here are some of the other implications that flow from this statistic.

Gasoline prices will rise. Last month, the price at the pumps was higher than it had ever been in December. Get used to it. There are likely more shocks on the way. A year ago at this time, $100 a barrel oil seemed a long way off. Now it appears we could hit that mark in the first quarter of 2011 and gasoline prices will rise accordingly.

Deflation concerns will ease. Because oil and petroleum by-products are so pervasive in the economy, we can expect to pay more for everything from air fares to plastic containers. It will cost more to cook burgers on the barbecue (propane), to apply make-up (lipstick), and to ease headaches (Aspirin). The list of common personal and household products that contain oil in some form is astonishing: crayons, telephones, hearing aids, carpets, shampoo, golf balls, etc. etc. A rising oil price will make it more expensive to produce all of these things, suggesting that inflation, rather than deflation, is a more likely threat for 2011.

Global warming. Talk all you want about solar, wind, biomass, and other alternative energy sources. We are not going to kick the oil habit any time soon. If efforts to combat climate change are to have any effect at all, policy makers must accept that reality and work to find ways around it. Good luck!

The stock market. A strengthening global economy has positive implications for stock markets in 2011, especially oil stocks. The S&P/TSX Capped Energy Index was a weak performer in 2010, gaining only 8.7 per cent compared to 14.4 per cent for the Composite Index. Granted, returns were dragged down by the underperformance of natural gas giants like Encana. But many of the big oil companies are still trading well below their 2008 highs. For example, Suncor (TSX: SU) stock can be purchased at slightly more than half its all-time high of $70.34, reached in May 2008. You can buy Imperial Oil (TSX: IMO) at a one-third discount from its June 2008 high of $60.93. Nexen (TSX: NXY), which is 85 per cent weighted to oil, is trading at about half its June 2008 high of $41.56. And so it goes.

I think there are bargains galore in the energy sector, just as there were in bank stocks back in March 2009. A year from now, I believe we will look back and kick ourselves if we don’t take advantage of them.

Photo ©iStockphoto.com/ Jiri Moucka

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