“The only two real characters that count are supply and demand,” as the oil historian Daniel Yergin has said about the market. Since last summer’s slump in oil prices, much has been written about supply – the Saudis’ apparent attempt to win market share and to drive out competitors. Less has been said about demand, which has an equally important, if less visible, role in the drama.
A revival in oil prices will allow shale oil producers to rebound, while more oil is on the way from Iran next year. For prices to move sustainably higher, demand also has to increase.
In the seven years of rising oil prices from 2001 to the global financial crisis in 2008, global oil demand, driven by China, rose each year on average by 1.2 million barrels per day. Since 2009, demand growth has actually been faster, partly fuelled by China's post-crisis stimulus programme. But developed-country demand has been contracting sharply, losing 200,000 bpd each year since the crisis.
Consumers have been driving less and buying smaller and more efficient vehicles, airlines have sought to save fuel everywhere from newer planes to eliminating in-flight magazines, and cargo ships have sailed more slowly to reduce drag.
Theoretically, lower oil prices should encourage consumption – and signs of this are now showing up in the data, with the International Energy Agency expecting a 1.7 million bpd increase in global demand this year, slowing to a 1.4 million bpd gain next year.
Chinese, US and Indian growth have all been strong so far this year. The Chinese official figures, showing increased consumption of 1.3 million bpd, are somewhat suspect, as a large part may represent oil going into strategic storage. It is hard to reconcile such rapid demand growth with signs of a slowdown in the Middle Kingdom’s economy.
But the US gain of 470,000 bpd and the Indian increase of 205,000 bpd appear real enough. American petrol use is up 4 per cent this year, and drivers’ mileage has risen sharply since the start of last year, passing its pre-recession record. Also significant is that European demand, which has declined every year since its 2005 peak, is showing signs of eking out an increase.
During the period of high prices, there were many theories that OECD oil consumption had passed its peak – because of tightening vehicle mileage standards, sluggish economies and ageing populations. Those theories may still be valid, but at least in the short term, demand seems set for a rebound. A resurgence of consumption would greatly ease the task of the Saudis and their Opec colleagues in restoring oil prices, even if swollen inventories are only likely to be drawn down from the second half of next year.
The longer-term picture is cloudier. The average Chinese person uses only three barrels of oil annually, the average Indian just 1.1 barrels, against the American who burns through almost 22 barrels. Although China has shifted on to a path of slower and less resource-intensive growth, there is clearly huge scope for more private transport, while India is currently the fastest-growing large economy.
However, alternative-fuel vehicles – natural gas, hybrids and electric cars – are becoming more practical, and increasingly favoured by governments. The current rebound in US petrol use will be slowed or stopped by the planned tightening of car mileage standards. Meanwhile, countries such as Morocco, the UAE, Iran and India are eliminating fuel subsidies, and others will surely follow.
Lower oil prices are helping to bring the character of demand back to the stage. But prices cannot rise too far, or they would choke off this temporary resurgence. Major oil producers can applaud some rebound in the market for their product, as long as they plan for the day when the curtain falls on growing oil use.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.
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