Demand shock
The BP Amoco Statistical Review of World Energy in its 2003 edition notes the 'surprising growth' of world energy demand since 2001 and 2002 - about 2.6% annual compared with a so-called "10-year trend rate of 1.4% annual" . Within this trend, and according to BP Amoco, the OECD IEA and other energy sector institutions, world oil demand's trend or underlying average growth rate would be about 1.3% per year. This '10-year trend', for oil, gas and latterly coal was in fact already giving way to higher yearly growth rates by about 1995, and has little or nothing to do with oil prices.
By comparison and during the 1975-79 period, with oil prices in today's dollars in the $38-$55/bbl range, world oil demand growth easily averaged 4% annual by volume. Current demand growth rates in the Asia-Pacific region, since 1992 second only to North America as an oil importer and consumer, are generally in the 4%-6% annual range for many regional countries including China and India. It is therefore easy to suggest the "10-year trend" of 1.4% for commercial energy, and about 1.3% annual for oil was an aberration. In addition, if oil prices played any role at all in setting this low growth trend, it was through cheap oil and gas in the 1986-99 period. The main determinant of low demand growth was continually falling rates of economic growth in the OECD countries. Since at latest 1995-1997 this low growth trend has given way to higher annual growth rates, for a large number of reasons notably including faster industrial growth outside the OECD bloc.
This in turn underlines exactly why, in late 1997 and through 1998 it suddenly became rather important for OPEC suppliers, usually enmeshed in a losing battle of oversupplying a relatively 'stagnant' market (again in market cosmology but not in fact), to vigorously increase supply. The 10% increase decided at the December 1997 Jakarta meeting was - several months later - saluted by a tripling of prices, after a 'ritual' price crash. The real world fact of this change in oil market mythology - the market no longer being 'structurally oversupplied' - is that demand shock had started to act well before 1997. This can be appreciated by comparing annual increases of world demand through 1995-99 with increases through 1990-94.
The almost complete lack of 'price elasticity' relations between oil prices, and world oil demand can be appreciated from the fact that almost each time oil prices tended to rise demand increased within about 6-12 months. This is particularly flagrant for 1999 compared with 1998: after an approximate tripling in terms of peak-trough year prices world oil demand increased at its highest rate in nearly a decade! Whenever prices fell during the 1990-99 period, demand growth rates tended to fall. This again proves, if proof is needed, that world oil demand is dependent on global economy growth and yearly changes in that growth, and is usually unrelated and un-linked to the oil price except when very, very high prices are attained in a very short period of time. Over the short-term, and depending on prices attained, demand often increases as prices rise.
This above can be better appreciated when annual price variations for major volume traded crudes are expressed in constant 2003 US dollars, as shown below:
World potential demand is almost unlimited
Insofar as potential demand is concerned, any supplier (whether OPEC or not) should be joyful, or very concerned for their forward national security when serious analysis is given to real world oil demand structures and growth drivers. These are are all, finally, due to demographic and economic growth, to conventional technology used in the economic process, and to the very slow progress in finding real, economic, and effective substitutes for oil, gas or even coal.
Oil remains the economic 'swing fuel' par excellence, and oil price increases - up to certain supposedly 'extreme' levels - always tend to increase or restore economic growth at the world or 'composite' level. In addition oil shock or sudden and large price increases, or slower acting but large price rises that 'stick' also change the type of growth towards more energy-intense industrial and manufactured products, away from more services based, lower energy activities. This 'perverse' factor itself increases oil intensity of world economic output and raises the 'oil coefficient' or percentage increase in oil demand for a percentage point growth of the economy. This macroeconomic change can affect all economies, some faster than others, during a certain time period. Wholly unlike the stock of myths, and 'facts' without foundation that circulate inside the oil market trading community these effects can be measured and have predictive value. In brief, a regime of higher oil and energy prices will tend to lever up world composite or global economic growth rates. This, in turn, produces the 'perverse result' of firm demand for much more costly oil and gas.
Oil demand drive elements - 'demographic' demand
Current oil demand worldwide extends down from 25.6 barrels/capita/year (bpy) for the USA to well below 0.2 bpy in rural areas of low income developing countries (LDCs). The world average, which fell slowly for around 15 years through 1978-93, is about 4.5 bpy. As a pure projection, if the world's current 6.3 Bn population consumed oil at current US per capita rates this would generate a demand of around 445 Million barrels/day (Mbd). At the other extreme, at 0.2 bpy world total oil demand would be telescoped to less than 3.5 Mbd. The current, real world average of 4.5 bpy is around one-third the average for European Union countries, and more than 4 times that of India, and over 3 times that of China - which will soon become the world's biggest industrial economy. Annual increase of the world's population (which is continuing to fall as a percentage rate, and in absolute numbers) is now running at about 85 Million. At the world average of 4.5 bpy this itself generates a 'latent' or potential growth in world oil demand of about 1.06 Mbd annual, assuming no change in the energy economy, no fuel substitution, and also no economic growth.
The following points are highly significant:
1 - If world average oil demand per capita in 2003 was the same as in 1980 (about 5.28 bpy with oil prices, in today's dollars at up to $100/barrel), world oil demand today would be at least 12.5 Mbd higher than it is. World demand in 2003 would run at an average of about 91 Mbd. There is no certainty at all that world supply would or could satisfy this demand.
2 - If we take current average annual world consumption (4.51 bpy) the 'demographic demand growth rate' of 1.06 Mbd per year is likely an incompressible minimum, except in the event of very severe global economic recession with actual contraction of world oil demand. Given annual loss of capacity from depletion at a minimum of 1.25 Mbd, the total new capacity or increase of production by existing fields needed each year is at least 2.31 Mbd, assuming virtual 'zero economy change-zero growth' as being a viable and sustainable situation.
3 - Any sustained growth in the world economy, that is recovery from recession in the OECD bloc, and/or continued fast economic growth in China, India, Brazil, Pakistan, Iran, Turkey and other large population 'emerging' New Industrial Countries (NICs), will significantly increase total annual world oil demand growth to far above 1.06 Mbd, perhaps to its double (about 2.1 Mbd). The current trend rate of growth is at least 2.25% annual (about 1.75 Mbd additional demand in 2003).
4 - Given that world oil demand has increased about 12 Mbd since 1991 it is wholly unrealistic to imagine that cumulative growth will be any less than this in the next 12 years, except if there is worldwide economic recession, or coordinated, legislative-backed world action for energy transition.
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