July 13, 2007
Oil prices and demand: a broken relationship?
The International Energy Agency, the industrialised countries’ energy watchdog, on Friday said oil demand in 2008 will grow by 2.5 per cent to 88.2m barrels a day (the FT story is here) in spite of record high oil prices.
It also called for Opec to increase its output to avoid a tight oil market in the second quarter of the year. Oil prices, meanwhile, are rising.
The acceleration in demand growth of 1.5 per cent this year suggests that the traditional relationship between oil prices and demand is breaking apart. Or is it?
If you have asked the Energyfilter team five years ago what would happen with oil demand if prices averaged in any year $65 a barrel, the response would be: a sharp drop! For the record, Brent oil price averaged $66.1 a barrel in 2006 and so far this year the price average is $64.5 a barrel.
But prices still matter, although far less than they did in the 1980s and 1990s. Last year, the IEA also projected strong demand growth for 2007, only to be forced to cut that estimate as ongoing oil prices dent some of the consumption increase.
That transformed a forecast published just a year ago for oil demand growth in 2007 of 1.8 per cent to another now of 1.5 per cent. Still, that is peanuts if you think about how tight supply is.
This year’s oil price-induced slowdown in demand growth looks small. And with an initial projection of 2.2 per cent increase for 2008, everything is in place for a strong growth next year - whether or not the current price spike is sustained.
Indeed, if the IEA numbers hold, next year would register the steepest oil consumption increase since 2004.
Developing countries such as China or India are responsible for much of the fracturing relationship between oil prices and demand growth. Almost two-thirds of the global demand increase in 2008 will come from non-OECD countries, driven by buoyant demand in China (an increase of 6.1 per cent) and the Middle East (4.5 per cent).
The good news for consuming nations are that "both in terms of spare upstream capacity and refinery flexibility, 2008 looks at this stage to be slightly more comfortable than 2006 and 2007," according to the IEA.
