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The 2011 Report on Manufacturing Petroleum and Coal Products: World Market Segmentation by City
ICON Group International, Jan 2011, Pages: 336
Market Potential Estimation Methodology
Overview
This study covers the world outlook for manufacturing petroleum and coal products across more than 2000 cities. For the year reported, estimates are given for the latent demand, or potential industry earnings (P.I.E.), for the city in question (in millions of U.S. dollars), the percent share the city is of the region and of the globe. These comparative benchmarks allow the reader to quickly gauge a city vis-à-vis others. Using econometric models which project fundamental economic dynamics within each country and across countries, latent demand estimates are created. This report does not discuss the specific players in the market serving the latent demand, nor specific details at the product level. The study also does not consider short-term cyclicalities that might affect realized sales. The study, therefore, is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved.
This study does not report actual sales data (which are simply unavailable, in a comparable or consistent manner in virtually all of the cities of the world). This study gives, however, my estimates for the worldwide latent demand, or the P.I.E. for manufacturing petroleum and coal products. It also shows how the P.I.E. is divided across the world’s cities. In order to make these estimates, a multi-stage methodology was employed that is often taught in courses on international strategic planning at graduate schools of business.
What is Latent Demand and the P.I.E.?
The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if a market is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability).
The latent demand for manufacturing petroleum and coal products is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be lower either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a city market.
Another reason why sales do not equate to latent demand is exchange rates. In this report, all figures assume the long-run efficiency of currency markets. Figures, therefore, equate values based on purchasing power parities across countries. Short-run distortions in the value of the dollar, therefore, do not figure into the estimates. Purchasing power parity estimates of country income were collected from official sources, and extrapolated using standard econometric models. The report uses the dollar as the currency of comparison, but not as a measure of transaction volume. The units used in this report are: US $ mln.
For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends) and not adjusted for future dynamics in exchange rates (i.e., the figures reflect average exchange rates over recent history). If inflation rates or exchange rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (when expressed in U.S. dollars, not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand.
As mentioned earlier, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. If fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be an international latent demand for manufacturing petroleum and coal products at the aggregate level. Product and service offering details, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand.
The Methodology
In order to estimate the latent demand for manufacturing petroleum and coal products on a city-by-city basis, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a country, city, state, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium in realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.
Ignoring, for the moment, exogenous shocks and variations in utility across countries, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled 'A' in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data across countries). This type of consumption function is show as 'B' in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant.
Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households, industries or countries with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related and interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for manufacturing petroleum and coal products across some 230 countries. The smallest have fewer than 10,000 inhabitants. I assume that all of these counties fall along a 'long-run' aggregate consumption function. This long-run function applies despite some of these countries having wealth, current income dominates the latent demand for manufacturing petroleum and coal products. So, latent demand in the long-run has a zero intercept. However, I allow firms to have different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).
Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for manufacturing petroleum and coal products. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories, not just manufacturing petroleum and coal products.
Step 1. Product Definition and Data Collection
Any study of latent demand across countries requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key countries or cities are more likely to be at or near efficiency than others. These are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the world’s highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e., China has high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income per capita). Brunei, Nauru, Kuwait, and Lichtenstein are examples of countries with high income per capita, but not assumed to be efficient, given low aggregate level of income (or gross domestic product); these countries have, however, high incomes per capita but may not benefit from the efficiencies derived from economies of scale associated with large economies. Only countries with high income per capita and large aggregate income are assumed efficient. This greatly restricts the pool of countries to those in the OECD (Organization for Economic Cooperation and Development), like the United States, or the United Kingdom (which were earlier than other large OECD economies to liberalize their markets).
The selection of countries is further reduced by the fact that not all countries in the OECD report industry revenues at the category level. Countries that typically have ample data at the aggregate level that meet the efficiency criteria include the United States, the United Kingdom and in some cases France and Germany.
Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of “manufacturing petroleum and coal products” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within manufacturing petroleum and coal products falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all cities and the world at large (without needing to know the specific parts that went into the whole in the first place).
Given this caveat, this study covers “manufacturing petroleum and coal products” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). manufacturing petroleum and coal products The NAICS code for manufacturing petroleum and coal products is 3241. It is for this definition of manufacturing petroleum and coal products that the aggregate latent demand estimates are derived. “Manufacturing petroleum and coal products” is specifically defined as follows:
3241
Petroleum and Coal Products Manufacturing
32411
This industry comprises establishments primarily engaged in refining crude petroleum into refined petroleum. Petroleum refining involves one or more of the following activities: (1) fractionation; (2) straight distillation of crude oil; and (3) cracking.
324110
This industry comprises establishments primarily engaged in refining crude petroleum into refined petroleum. Petroleum refining involves one or more of the following activities: (1) fractionation; (2) straight distillation of crude oil; and (3) cracking.
3241101
Gasoline, including finished base stocks and blending agents
32411011
Gasoline, including finished base stocks and blending agents
324110111
Aviation gasoline (except jet fuel) incl finished base stocks & blending agents
3241101111
Aviation gasoline (excluding jet fuel), including finished base stocks and blending agents
3241101121
Motor gasoline, including finished base stocks and blending agents
32411013
Motor gasoline, including finished base stocks and blending agents
324110134
Regular gasoline
324110135
Mid-premium gasoline
324110136
Premium gasoline
3241102
Jet fuel
3241103
Kerosene, except jet fuel
3241104
Light fuel oils
32411041
Jet fuel
324110411
Home heating oil and other distillates, NEC
3241104111
Jet fuel, naphtha_type
3241104121
Jet fuel, kerosene_type
324110413
Diesel fuel
3241105
Heavy fuel oils, including No. 5, No. 6, heavy diesel, gas enrichment oils, etc.
3241107
Lubricating oil and greases, made in a refinery
32411071
Kerosene, excluding jet fuel
3241107100
Kerosene, excluding jet fuel
3241108
Unfinished oils and lubricating oil base stock
3241109
Asphalt
324110A
Liquefied refinery gases, including other aliphatics(feed stock and other uses)
324110A1
Light fuel oils
324110A111
Distillate light fuel oil, including grades No. 1, 2, light diesel_type, light gas_ enrichment oils, etc.
324110A121
No. 4 type light fuel oil
324110D
Other finished petroleum products, including waxes
324110D1
Heavy fuel oils, including grades No. 5, 6, heavy diesel_type, heavy gas_ enrichment oils, etc.
324110D100
Heavy fuel oils, including grades No. 5, 6, heavy diesel_type, heavy gas_ enrichment oils, etc.
324110G
PETROLEUM LUBRICATING OILS AND GREASES, MADE IN A REFINERY
324110G1
Petroleum lubricating oils and greases, made in a refinery
324110G111
Lubricating oils (including hydraulic fluids, quenching and cutting oils, transformer oils, liquid rust preventives, etc.), made in a refinery
324110G121
Lubricating greases, made in a refinery
324110J
UNFINISHED OILS AND LUBRICATING OIL BASE STOCK
324110J1
Unfinished oils and lubricating oil base stock
324110J111
Unfinished oils, naphthenic and paraffinic
324110J121
Naphtha and other unfinished oils for use as petrochemical feedstocks, excluding carbon black
324110J131
Carbon black feedstock (unfinished oils)
324110J141
Lubricating oil petroleum_base bright stock
324110J151
Lubricating oil petroleum_base neutral stock
324110J161
Lubricating oil petroleum_base red and pale oils
324110J171
Other lubricating oil petroleum_base stocks
324110M
Miscellaneous receipts
324110M1
Asphalt
324110M111
Paving grade asphalts
324110M121
Roofing grade asphalts
324110M131
All other miscellaneous asphalts
324110P
Primary products
324110P1
Liquefied refinery gases (aliphatics), made in a refinery
324110P111
Liquefied refinery gases (aliphatics), for use as a chemical raw material, made in a refinery
324110P121
Liquefied refinery gases (aliphatics), for other uses, made in a refinery
324110S
Secondary products
324110SM
Secondary and miscellaneous products
324110T
OTHER FINISHED PETROLEUM PRODUCTS, INCLUDING WAXES, MADE IN A REFINERY
324110T1
Other finished petroleum products, including waxes, made in a refinery
324110T111
Petrolatum
324110T121
Petroleum coke
324110T131
Calcined petroleum coke, made in a refinery
324110T141
Road oil, made in a refinery
324110T151
Still gas (refinery gas)
324110T161
Special petroleum naphthas
324110T171
Aromatics (benzene, toluene, xylene, etc.), for use as a chemical raw material, made in a refinery
324110T181
Aromatics (benzene, toluene, xylene, etc.), for other uses, made in a refinery
324110T191
Microcrystalline petroleum waxes, made in a refinery
324110T1A1
Fully refined crystalline petroleum waxes, made in a refinery
324110T1B1
Other crystalline petroleum waxes, made in a refinery
324110T1C1
Other finished petroleum products, made in a refinery
32412
This industry comprises establishments primarily engaged in (1) manufacturing asphalt and tar paving mixtures and blocks and roofing cements and coatings from purchased asphaltic materials and/or (2) saturating purchased mats and felts with asphalt or tar from purchased asphaltic materials.
324121
This U.S. industry comprises establishments primarily engaged in manufacturing asphalt and tar paving mixtures and blocks from purchased asphaltic materials.
3241210
ASPHALT PAVING MIXTURES AND BLOCKS
32412101
Asphalt paving mixtures and blocks
3241210111
Emulsified asphalt, including liquid additives
3241210121
Other liquid asphalt and tar paving materials, including cut_backs
3241210131
Asphalt and tar paving mixtures (excluding liquid), including bituminous or asphaltic concrete, and asphaltic paving cements
3241210141
Other asphalt paving mixtures, excluding brick, concrete, granite, or stone
3241211
Asphalt paving mixtures & blocks
324121M
Miscellaneous receipts
324121P
Primary products
324121S
Secondary products
324121SM
Secondary products and miscellaneous receipts
324122
This U.S. industry comprises establishments primarily engaged in (1) saturating purchased mats and felts with asphalt or tar from purchased asphaltic materials and (2) manufacturing asphalt and tar and roofing cements and coatings from purchased asphaltic materials.
3241221
Roofing asphalts and pitches, coatings, and cements
32412211
Roofing asphalt
3241221111
Roofing asphalt
32412212
Fibrated and nonfibrated asphaltic roofing coatings
3241221221
Fibrated asphaltic roofing coatings
3241221231
Nonfibrated asphaltic roofing coatings
32412213
Other roofing asphalts and pitches, coatings, and cements
3241221341
Asphaltic roofing cements
3241221351
Other roofing asphalts and pitches, coatings, and cements, including coal tar base coatings, cements, and roofing pitch
3241222
Prepared asphalt and tar roofing and siding products
32412221
Asphalt smooth_surfaced roll roofing and cap sheets, organic and fiberglass base
3241222121
Asphalt smooth_surfaced roll roofing and cap sheets, organic base
3241222131
Asphalt smooth_surfaced roll roofing and cap sheets, fiberglass base
32412222
Asphalt mineral_surfaced roll roofing and cap sheets, organic and fiberglass base
3241222241
Asphalt mineral_surfaced roll roofing and cap sheets, organic base
3241222251
Asphalt mineral_surfaced roll roofing and cap sheets, fiberglass base
32412223
Asphalt strip shingles, organic base (excluding laminated), all weights
3241222361
Asphalt strip shingles, organic base (excluding laminated), 235 to 240 lb_ sales sq
3241222371
Asphalt strip shingles, organic base (excluding laminated), all other weights
32412224
Asphalt strip shingles, inorganic base (excluding laminated), 215 to 235 lb_ sales sq
3241222481
Asphalt strip shingles, inorganic base (excluding laminated), 215 to 235 lb_ sales sq
32412225
Asphalt strip shingles, inorganic base (excluding laminated), all other weights
3241222591
Asphalt strip shingles, inorganic base (excluding laminated), all other weights
32412226
Laminated or multilayered asphalt strip shingles, and individual shingles
32412226A1
Laminated or multilayered asphalt strip shingles, organic or inorganic base
32412226B1
Asphalt and tar individual shingles, organic or inorganic base, all styles
32412227
Other prepared asphalt and tar products for roofing and siding
3241222711
Asphalt and tar saturated felts and boards for nonbuilding use
32412227C1
Modified bitumen membranes, styrene butadiene styrene (SBS)
32412227D1
Modified bitumen membranes, atactic polypropylene (APP)
32412227E1
Saturated asphalt and tar building ply felts, organic base
32412227F1
Saturated asphalt and tar building ply felts, fiberglass base
32412227G1
Other saturated asphalt and tar building felts, organic base
32412227H1
Other saturated asphalt and tar building felts, fiberglass base
32412227J1
Other prepared asphalt and tar products for roofing and siding
324122M
Miscellaneous receipts
324122P
Primary products
324122S
Secondary products
324122SM
Secondary products and miscellaneous receipts
32419
This industry comprises establishments primarily engaged in manufacturing petroleum products (except asphalt paving, roofing and saturated materials) from refined petroleum or coal products made in coke ovens not integrated with a steel mill.
324191
This U.S. industry comprises establishments primarily engaged in blending or compounding refined petroleum to make lubricating oils and greases and/or re-refining used petroleum lubricating oils.
3241910
PETROLEUM LUBRICATING OILS AND GREASES, MADE FROM REFINED PETROLEUM
32419101
Petroleum lubricating oils and greases, made from refined petroleum
3241910111
Lubricating oils (including hydraulic fluids, quenching and cutting oils, transformer oils, liquid rust preventives, etc.), made from refined petroleum
3241910121
Lubricating greases, made from refined petroleum
3241911
Lubricating and similar oils
3241912
Lubricating greases
324191M
Miscellaneous receipts
324191P
Primary products
324191S
Secondary products
324191SM
Secondary products and miscellaneous receipts
324199
This U.S. industry comprises establishments primarily engaged in manufacturing petroleum products (except asphalt paving, roofing, and saturated materials and lubricating oils and greases) from refined petroleum and coal products made in coke ovens not integrated with a steel mill.
3241991
Coke oven and blast furnace products, not made in steel mills
32419911
Coke oven and blast furnace products, made in coke oven establishments
3241991111
Coke oven products, coke (excluding screenings and breeze), made in coke oven establishments
3241991121
Coke oven products, screenings and breeze, made in coke oven establishments
3241991131
Coke oven products, crude tar, made in coke oven establishments
3241991141
Coke oven products, crude light oil, made in coke oven establishments
3241991151
Coke oven products, other (including tar derivatives, ammonia, light oil derivations, and coke oven gas), made in coke oven establishments
3241992
All other petroleum and coal products, except coke oven products
32419921
Calcined petroleum coke, made in coke oven establishments
3241992131
Calcined petroleum coke, made in coke oven establishments
32419922
All other petroleum and coal products, made in coke oven establishments
3241992211
Microcrystalline petroleum waxes, made from refined petroleum
3241992221
Crystalline petroleum waxes, made from refined petroleum
3241992241
All other petroleum and coal products, including packaged fuel and fuel briquettes, made in coke oven establishments
324199MM
Miscellaneous receipts
324199P
Primary products
324199SM
Secondary products and miscellaneous receipts
324199SS
Secondary products
Step 2. Filtering and Smoothing
Based on the aggregate view of manufacturing petroleum and coal products as defined above, data were then collected for as many similar countries and cities as possible for that same definition, at the same level of the value chain. This generates a convenience sample from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a country, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a country stricken with foot and mouth disease), these observations were dropped or 'filtered' from the analysis.
Step 3. Filling in Missing Values
In some cases, data are available for countries or cities on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national income. Based on the overriding philosophy of a long-run consumption function (defined earlier), cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that country.
Step 4. Varying Parameter, Non-linear Estimation
Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant across cities unless there is empirical evidence to suggest that this effect varies (i.e., the slope of the income effect is not necessarily same for all countries). This assumption applies across cities along the aggregate consumption function, but also over time (i.e., not all cities are perceived to have the same income growth prospects over time and this effect can vary from city to city as well). Another way of looking at this is to say that latent demand for manufacturing petroleum and coal products is more likely to be similar across cities that have similar characteristics in terms of economic development (i.e., African cities will have similar latent demand structures controlling for the income variation across the pool of African cities).
This approach is useful across cities for which some notion of non-linearity exists in the aggregate consumption function. For some categories, however, the reader must realize that the numbers will reflect a city’s contribution to global latent demand and may never be realized in the form of local sales. For certain category combinations this will result in what at first glance will be odd results. For example, the latent demand for the category “space vehicles” will exist for cities in “Togo” even though they have no space program. The assumption is that if the economies in these countries did not exist, the world aggregate for these categories would be lower. The share attributed to these cities is based on a proportion of their income (however small) being used to consume the category in question (i.e., perhaps via resellers).
Step 5. Fixed-Parameter Linear Estimation
Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because the world consists of more than 2000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a city has no current income, the latent demand for manufacturing petroleum and coal products is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand manufacturing petroleum and coal products). In a graphical sense, for low income cities, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, low-income cities are assumed to have a latent demand proportional to their income, based on the city closest to it on the aggregate consumption function.
Step 6. Aggregation and Benchmarking
Based on the models described above, latent demand figures are estimated for all cities of the world, including for the smallest economies. These are then aggregated to get world totals and regional totals. To make the numbers more meaningful, regional and global demand averages are presented. Figures are rounded, so minor inconsistencies may exist across tables.
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