The expansion of the emerging economies in recent years has been a major factor contributing to demand for oil and other key commodities. While representing only 42% of global economic growth at the start of the last decade, developing and emerging economies are expected to contribute 76% of this year’s 3.3% global growth, with the biggest part coming from China and India. This steady shift in contribution to total GDP has led to a substantial hike in demand for energy in the developing and emerging economies, particularly from China, India, Latin America and the Middle East. In recent years, developing and emerging economies have constituted the sole source of incremental oil demand growth, amounting to a cumulative increase of 15 mb/d since 2000. Given its strong economic growth, China alone has doubled its oil consumption over the past 12 years. This represents a marked contrast to the developed economies, which have seen a contraction in their oil demand of more than 4 mb/d since 2005, driven largely by energy policies. As these divergent trends are expected to continue, non-OECD consumption will exceed that of the OECD within the next few years. This change in the overall demand structure is already altering oil demand seasonality, putting the third quarter on top due to summer cooling needs and agricultural sector demand in the developing world, in addition to the traditional higher oil consumption in the developed economies during the driving season. Thus, oil prices have become increasingly sensitive to the economic conditions in these dynamic regions, particularly China.
A review of current economic developments shows that the impact of the recent global slowdown — originating from developed economies, mainly the Euro-zone — is particularly visible in emerging Asia. Manufacturing activity in China and India slowed in the first half of the year. Meanwhile, some developed economies are also being affected, including South Korea which in July suffered its sharpest fall in exports since 2009, declining 8.8% from a year earlier. Meanwhile, Japan has also faced a drop in exports and the pace of its economic recovery continues to be restrained. Bank deleveraging policies in the European Union have also negatively affected the funding flows to developing and emerging economies. The escalation of the Eurozone crisis has dented immediate growth prospects for Eastern Europe, as well as Latin America, including its largest economy, Brazil. The recovery in the MENA region has also been constrained by such factors as decelerating domestic consumption and softening demand from the EU.
Despite these short-term difficulties, the medium-term outlook is more positive. Emerging Asia is expected to continue to benefit from China’s position as a major driving force behind global growth. In Latin America, policy initiatives adopted to boost economic activities should begin to show more of an impact by the second half of 2013. While the Euro-zone crisis is likely to remain a major source of uncertainty in the oil market during the second half of the year, positive developments in the emerging markets could help to underpin global growth, as well as to ease some of the challenges faced by the developed economies, which are their main trading partners. This would also provide steady support for oil and other commodities.
