“The recent report on energy from DNB was indeed a blockbuster. Obama conveniently announced his new CAFÉ standards and other vehicle efficiency targets the next day which matched up to their expectations. If DNB is proven correct that peak oil demand occurred in 2005 and we see anything like DNB predicts as far as global 2020 oil demand is concerned, what will the impact be for U.S. terms of trade levels, and if positive what would the implications be?”

Eoin Treacy's view Thank you for this question which is sure to be of interest to other subscribers. The DNB team's contention is that oil demand peaked in OECD economies in 2005. Demand continues to grow outside the OECD. The associated downward trend in US refined product consumption is a point Allen Brooks at PPHB has often made in his Musings from the Oil Patch report.

When one takes the wide spread between oil and gas prices into account there are additional reasons why oil demand may be under pressure. The confluence of an upward trend in North American oil and gas production following a secular decline suggests that while the medium-term outlook for oil prices is still bullish, the long-term should see prices return to more reasonable levels.

Let us consider a hypothetical (and reasonably plausible in my opinion) scenario where energy prices stay lower for longer, factory automation and cloud computing persist on their current growth trajectories and Wall Street completes its secular process of valuation contraction at some point before 2020. These developments could potentially be extraordinarily bullish for the US stock market and economy. However this is subject to governance improving and debt being held in check.

In such an environment, North America's advantage in energy production would be best served by somewhat higher energy prices. The historically high cost of new marginal production will probably ensure that prices hold above the long-term base near $40.