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Page added on November 28, 2016

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Hey Oil Market: Forget About OPEC for a Second

Consumption

The oil market’s attention is focused overwhelmingly on figuring out which OPEC member is going to cut what. The bigger question it shouldn’t lose sight of is this: Who will replace China?

Looking back over 50 years, oil demand has gone through three broad phases: pre-1970s industrialization in the OECD countries, retrenchment after the oil shocks, and then renewed growth through 2015. If the International Energy Agency’s latest long-range forecasts are right, then we stand on the edge of another slowdown in demand growth — a big one.

The Cycle Turns Again
The world appears to be on the cusp of another slowdown in oil demand growth. Change in average oil demand growth per decade
Sources: BP, International Energy Agency
Note: Data show change in average global oil demand in each decade ending that year compared to the prior decade. Projections after 2015 reflect the IEA’s “New Policies” scenario.

Beneath those headline numbers, though, leadership in global oil-demand growth has been passed around like an Olympic torch. Here, we’ve broken down average demand growth in each decade by region:

oil-regions-1116

Until the early years of the 21st century, the OECD ruled the roost, even during the post-oil-shock squeeze. In the years before the 1980s, this reflected broad-based economic growth in the U.S., Western Europe and Japan. The resurgence of the 1990s was more lopsided, owing much to North America’s SUV boom.

All that flipped on its head after 2005. The decade just ended was all about China. Directly, it accounted for almost 40 percent of the growth in oil demand. Indirectly, the high oil prices this spawned jolted the economies of exporting regions such as the Middle East. Even the countries of the former Soviet Union were flipped back to increased oil demand after years of decline.

Looking at the IEA’s forecast, though, the OECD’s drag on global oil demand growth looks set to deepen: At 4.2 million barrels a day, the projected decline in the decade through 2025 almost offsets the 4.5 million-barrel-a-day increase in average Chinese demand over the past decade.

Looking back to what happened in the decade ending in 1985, it makes sense that demand growth should slow sharply after the price spikes of recent years. This time, however, a mixture of efficiency gains, penetration of electric vehicles, and slower economic growth due to unfavorable demographic trends mean a 1990s rebound in OECD oil demand isn’t in the cards.

China remains the biggest single source of demand growth, but at a much slower pace compared to the supercycle of the past decade. The burden of supporting higher demand thus begins to pass to India, along with a coalition made up of other industrializing bits of Asia and continued growth in the Middle East. Africa is also expected to play its part, although the “Rest of World” part of the charts above isn’t straightforward: A big chunk of the projected growth from 2015 onward refers to international shipping and jet demand, rather than specific regions, due to how the IEA segments its forecasts.

oil-region-112216-line-mult2

This is a more diffuse picture than in previous decades; the torch passes to many hands rather than one clear leader. What unites them all, though, is that they are emerging economies more dependent on global trade — for which the signs were not favorable even before the election of a U.S. president who is, rhetorically anyway, not averse to risking a trade war with China. Middle Eastern oil-demand growth, meanwhile, is tied heavily to global oil-demand growth.

Leaving the economic risks aside, oil bulls should note some other consequences of oil demand shifting eastward. In a report published earlier this year by Trusted Sources, an emerging-markets research firm based in London, analyst Kingsmill Bond pointed out that energy-demand growth in general is now centered on parts of the world that have good reasons not to necessarily retread the West’s path but seek a bigger role for renewable energy and electric vehicles.

One reason for this is pollution, with Indian cities in particular featuring prominently at the top of global rankings of lung-busting urban sprawls.

Another is geopolitics: A recurring feature of the past 50 years has been America’s swings between anxiety and exultation around the nebulous concept of energy independence. Reliance on oil imports, in particular, has been viewed as an Achilles heel, and shale resources have been hailed by many as a strategic advantage, not merely a source of energy.

Having peaked at 60 percent of oil consumption in 2005, U.S. imports accounted for just 24 percent of total consumption last year (weaker demand also played a role). China and India, on the other hand, are projected to become way more dependent on the kindness of (oil-producing) strangers than the U.S. ever was:

How’s That Navy Coming Along?
China and India are already more dependent on oil imports than the U.S. ever was — and projected to become even more so
Source: BP, International Energy Agency
Note: Data after 2015 are IEA projections under the “New Policies” scenario.

Beijing and New Delhi may be just fine with deeper involvement in a fractious Middle East, including the expense of building navies to protect far-flung sea lanes and all the other stuff the U.S. has done to keep oil flowing since World War II. Here’s guessing, though, that the future won’t simply repeat the past.

bloomberg



5 Comments on "Hey Oil Market: Forget About OPEC for a Second"

  1. joe on Tue, 29th Nov 2016 5:59 am 

    Peak growth? Capitalisms love affair with so called emerging markets is over, the corpse of growth is being picked clean. 1% growth is the best we can get from a world that NEEDS 2-3% to pay for present value debt. Taking the controls off banks will turn us all into Venezuela.
    Dark days ahead for crapitalism.

  2. makati1 on Tue, 29th Nov 2016 6:39 am 

    joe, I second that belief. Capitalism is basically dead, as many will soon find out.

  3. onlooker on Tue, 29th Nov 2016 7:00 am 

    Capitalism and its practice along with the concomitant greed is what has steered us into this dead end for humanity, so Capitalism may be dying but its taking us all along with it. As AP points out its part of our power/pleasure urges and instincts.

  4. Davy on Tue, 29th Nov 2016 7:35 am 

    Uh, what is the definition of capitalism that is supposed to be dead? Maybe a better way to look at it is the current status quo global market capitalism is in trouble in regards to traditional growth rates and generally accepted standards of affluence. You may want it dead but it will likely be around in an adapted form for the rest of most of our remaining lives. What are the alternatives?

  5. GregT on Tue, 29th Nov 2016 11:31 am 

    “What are the alternatives?”

    A vast reduction in human population numbers, and a planet capable of sustaining life as we knew it.

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