With oil prices up 70 per cent over the last 12 months, higher prices are set to moderate OECD consumption and thereby global demand growth in 2018/19. Chevron photo.
Consumption has risen by an average of 1.7 million b/d in the last three years since oil prices slumped
By John Kemp
LONDON, June 14 – Growth in global oil consumption has accelerated significantly since oil prices slumped in 2014 – highlighting the critical role demand plays in balancing the market.
Lower oil prices stimulated OECD consumption between 2015 and 2017 and played a big role in eliminating the global oil market surplus during the rebalancing phase of the cycle.
With oil prices up 70 per cent over the last 12 months, however, higher prices are set to moderate OECD consumption and thereby global demand growth in 2018/19.
Economists often observe that the price-elasticity of oil demand is low, meaning a small change in prices does not have much impact on the amount consumed in the short term.
But low impact does not mean no impact. In the case of a large and sustained change, such as occurred in 2014/15, consumption has proved significantly flexible and plays a key role in rebalancing the market.
According to the latest estimates from BP, global consumption increased by almost 1.7 million barrels per day (b/d) in 2017 (“Statistical Review of World Energy”, BP, 2018).
Consumption has risen by an average of 1.7 million b/d in the last three years since oil prices slumped (2015-2017) compared with an average of just 1.1 million b/d in the three previous years (2012-2014).
Real crude oil prices averaged $51 per barrel between 2015 and 2017, down from $112 between 2012 and 2014, according to BP.
OECD flexibility
Lower oil prices have helped stimulate faster consumption growth, especially in the industrialized countries of the Organization for Economic Cooperation and Development.
OECD consumption rose by an average of 580,000 b/d in 2015-2017 compared with an average decline of 280,000 b/d in 2012-2014.
By contrast, growth in the non-OECD economies slowed slightly, to an average annual rate of 1.2 million b/d from 1.4 million b/d earlier.
Faster growth in the OECD economies has accounted for all the acceleration in global fuel consumption since the slump.
The BP data underscores the important role that oil price and consumption changes in the advanced economies play in balancing the market.
Consumption in the rapidly developing non-OECD economies tends to be more strongly influenced by incomes and economic growth.
In the more mature OECD economies, however, consumption is more strongly influenced by large and sustained price changes.
Trend deviations
Non-OECD economies now account for the majority of global oil consumption (51 million b/d) compared with the OECD countries (47 million b/d).
Non-OECD economies also accounted for all consumption growth over the last ten years (+14 million b/d) while OECD consumption fell (-3 million b/d).
Even in the most recent three-year period, non-OECD use rose much faster (+3.5 million b/d) than in the OECD (+1.7 million b/d).
Non-OECD countries’ strongly rising oil demand linked to their economic development has been the principal driver of increasing oil consumption at global level.
But on a year-to-year basis, consumption changes in the more price-sensitive OECD have played a critical role in stimulating or moderating the growth rate.
In other words, the non-OECD economies are responsible for the overall rising trend in consumption but the non-OECD economies are significantly responsible for year-to-year variations in growth around that trend.
Demand restraint
OECD oil consumption may now account for a minority of global demand, and the annual changes may be relatively small, but they still play a critical role in market balancing.
The impact is clear in consumption statistics at national level, especially for the United States, where low levels of taxation ensure changes in crude prices have a big impact on the final cost of fuels to consumers.
U.S. gasoline consumption increased by an annual average of 133,000 b/d in 2015-2017 compared with an average of just 56,000 b/d in 2012-2014, according to the U.S. Energy Information Administration.
Consumption growth was especially pronounced in 2015 (+257,000 b/d) and 2016 (+139,000 b/d) when prices were low, compared with the much higher-priced 2011 (-240,000 b/d) and 2012 (-71,000 b/d).
The EIA currently predicts U.S. gasoline consumption will increase by just 20,000 b/d in 2018 and 40,000 b/d in 2019 (“Short-Term Energy Outlook”, EIA, June 2018).
(Editing by Dale Hudson)
John Kemp is a Reuters market analyst. The views expressed are his own.
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