World Oil Demand and Economic Crisis

In a Financial Times blog of 23 December 2009, Javier Blas claimed that Opec oil ministers fear the "appetite" for oil in the OECD developed countries is declining, in other words that OECD oil demand will fall from now on, and especially if oil prices become too high.

Other arguments with the same conclusion - OECD oil demand will fall - are made by oil economists including the IEA's chief economist Dr Fatih Birol and BP's chief economist Christof Ruehl.

Most of these experts say this is a long-term historic trend, not due to economic crisis, but caused by economic change and new sources of energy. These specially include cheap natural gas supplies and the development of alternate and renewable energy in response to political claims that the world faces "global warming catastrophe"

In previous columns I have given example of the many technical and finance problems for fast growth of "green energy", and on the exaggerated claims "climate catastrophe".

When we look at the alternate and renewable energy sources, and using data from the IEA, what it calls non-hydro renewables, that is mainly windpower, solar power and the biofuels, supplied about 1.8 per cent of world total commercial energy in 2009.

Excluding the biofuels, and only taking windpower and solar power (and very small supply from geothermal, tidal and other non-hydro renewable energy sources) these are growing fast but only contributed only about 0.7 per cent of world total energy in 2009, while oil supplied about 38 per cent.

Biofuels are especially important among the renewable energy sources because these are the only direct substitutes for oil. Windpower and solar power produce electricity, and world electricity is mostly produced from coal, nuclear power, natural gas and hydropower, not from oil.

Also, when we examine the biofuels closely, we find that output is low and they are very often not competitive with oil energy because their production is expensive. The biofuels however directly compete with food production and take up valuable agricultural resources - driving up food prices, rather than driving down oil prices.

CAN OECD COUNTRIES CUT THEIR OIL CONSUMPTION ?

There are several answers to this question. Comparing OECD oil demand with the rest of the world, the OECD countries with a combined population about 1.1 billion have very high per capita average oil consumption, of about 14.25 barrels per year and therefore their demand could theoretically be reduced quite easily.

However, experience since the 1970s shows the OECD countries, like the rest of the world, use more oil anytime there is solid economic growth. This was proved as recently as 2004-2007 when the strong global economy also generated economic growth in OECD countries, raising their oil demand.

Only in very steep recession, in 2008-2009 during which world trade contracted by as much as 15 per cent to 20 per cent (the biggest-ever trade fall since the 1930s), did we find there was a major fall in OECD oil demand. For some countries like the USA, this was about 7.75 per cent. Other OECD countries cut their oil demand - due to economic crisis in 2008-2009 - by amounts ranging from less than 5 per cent to nearly 10 per cent.

However we find that since late 2009 most OECD countries have stopped cutting their oil demand, and some are showing growth of oil demand, as their economies slowly recover from crisis.

Economic analysts study the "turnaround" of oil demand, from contraction to growth, as a sign of economic recovery and to be sure, oil demand of most non-OECD countries with growing economies is not showing any decline at all. This especially concerns China, India, Brazil, Indonesia, Pakistan, Argentina, Turkey and other emerging economies.

More simply, when there is economic growth oil demand grows. When the economic growth is strong, oil demand is strong.

This leaves the OECD group, which still takes about about 45 million barrels a day or 52.5 per cent of world oil demand for 16 per cent of world population, as the main possible candidate for stabilizing or reducing world oil consumption on a long-term basis. The main problem is that other than by economic recession, it is difficult to quickly cut oil demand and stop it rebounding when the economy recovers. This is the case in countries like USA, South Korea, and many EU27 states, and the reasons for this are quite simple.

In the OECD countries and for more than 30 years, since the "oil shocks" of the 1970s and the foundation of the IEA by US president Nixon and Secretary of state Kissinger, the policy of oil saving and energy conservation has been opposed by the policy seeking cheap oil supplies. In other words a policy of saving oil and improving energy efficiency has an opposite policy of seeking all ways and means to get cheap oil.

The IEA was for example set up with the initial goal of obtaining cheap oil supply contracts from OPEC countries, using false oil data and information to confuse OPEC NOCs or to incite competition between OPEC NOCs for contracts.

To be sure we now have some OECD political leaders very enthusiastic about green energy, and the EU27 countries and Japan have public engagement to the Kyoto Treaty to cut CO2 emissions by cutting fossil energy consumption.

Declining industrial output from the OECD countries is however probably the biggest real cause of slow growth in OECD oil demand for more than 15 years, and as we see OECD oil demand rises when economic growth is strong, as in 2004-2007.

The only real incentive to using less oil is higher and stable prices for oil, and the right energy policy to help efficiency improvement. Market trading of oil, as we know, is neither transparent, nor fair, nor efficient because of market rigging.

Cooperation between the OPEC states and the OECD states will be the only way forward to prevent oil price shocks and create efficient energy policies - we can hope in the near future.

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