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GDP growth and incremental oil demand - Sep 06

Source: OPEC_RP060902 9/15/2006, Location: Europe

Changes in the rate of growth of real GDP are usually perceived to be the main driver of fluctuations in oil demand growth. However, the recent strong growth in global GDP has not been matched with commensurate growth in oil demand. While global GDP grew at a robust 4% in the period 2000-2005, annual oil demand growth increased at a more moderate pace of 1.6%.

Over the past three decades, oil intensity — which is the amount of oil used to produce a unit of output* — has declined substantially in many countries, particularly in OECD countries. Oil intensities in OECD Europe have fallen almost by more than half since the 1970s to now stand at around 0.46 barrel of oil equivalent/US$1,000 in 2004. This represents an average yearly pace of minus 2.3%. In some smaller European countries, oil intensities in recent years have flattened out at a low level, suggesting a possible limit to the oil efficiency that a country can achieve.

Oil intensities vary due to geographic and demographic factors as well as available resources, the possibility of substitution and fiscal policies. In North America, oil intensity has also fallen although at a slower pace of 2.0% per annum. The USA requires a quarter less oil to produce a unit of output compared to the early 1970s, or 0.69 boe/US$1,000 in 2004 compared to 1.4 boe/$1,000 in 1970. Despite the downward trend, US oil intensity levels are still about 55% higher than in major European economies. Japan’s oil intensity is slightly lower than the USA at close to 0.6 boe/US$1,000 but higher compared to other OECD countries.

Oil intensities in Developing Countries, excluding OPEC nations, have also trended downwards but at a much slower pace than OECD countries. Amongst the major Developing Countries, China has seen a remarkable reduction in its oil intensity since the late seventies. The slower decline in oil intensities is due to the processes of economic development with some countries tending toward more energy-intensive industry while others have experienced considerable expansion in transport demand amid favourable oil product prices. As oil producing regions, both the FSU and OPEC exhibit intensities higher than the world average.

In the long run, strong price rises may intensify the downward trend in intensities — which may be occurring due to structural changes in the economy and saturation effects — by accelerating oil saving and substitution effects. At the same time, the large fluctuations in oil intensities seen in the recent past imply that the observed long-term trends in intensity may not be a reliable indicator for short-term oil demand forecasting, especially in Developing Countries, where the relationship between GDP and oil demand is less stable and therefore less predictable. A look at the relationship between oil demand growth and GDP growth in China makes this clear, as apparent oil demand growth has experienced strong swings over the last decade while economic growth has remained relatively steady.

In recent years, oil demand growth has come mainly from the Developing Countries which have accounted for 73% of incremental demand in the years 2000-2005, with China alone responsible for 27%. In 2005, Developing Countries already accounted for around 35% of total global oil demand. This was due in part to their strong economic growth, which exceeded that of OECD countries. Their growing importance highlights the need to derive accurate forecasts for oil demand of Developing Countries. The short-term volatility in oil demand suggests closer consideration of additional factors besides total GDP growth, such as sectoral analysis and product demand, as well as estimates of short-term effects of energy policies in the current high price environment. While these indicators apply equally to all countries, they assume even greater importance in estimating oil demand in the rapidly-changing Developing Countries.

In the face of increased short-term fluctuations in demand and the associated demand uncertainties, OPEC has nevertheless continued to meet market needs, providing an ample supply of crude which has helped build oil inventories to comfortable levels. With the approach of 2007, despite the uncertainty in both GDP growth prospects and the oil demand outlook, as well as the expected rebound in non-OPEC supply, OPEC at its recent Meeting of the Conference agreed that Member Countries would take the necessary steps to ensure that supply and demand remained in balance, with prices at reasonable levels to both producers and consumers, and conducive to continued healthy world economic growth.

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