Despite Lower Prices, Oil Demand Flat. A New Normal?

February 13, 2015

Sorry about jerky video. Audio is good. Analyst says oil could hit 20 bucks.

Yesterday, a major Oil CEO started making sensible noises about climate change, and the transition to renewables.  There are a number of reasons why, no doubt, including the burgeoning success of the Divestment movement, increasing awareness among big dollar investors of the “carbon bubble” – resources that must be left in the ground due to climate constraints, and the violent gyrations of the oil market in response to technological paradigm shift.

Normally, Econ 101 would predict that when you lower the price of an important commodity, demand would go up. Yet, that is not what we are seeing right now. There is an increasing, and for Big Oil, ominous, –  disconnect between GDP and oil demand.
This ain’t a normal correction, folks. This is an historic transition.

CNBC:

Goldman Sachs slashed its oil price forecasts, saying the market’s “new normal” for crude means it’s likely to remain lower for longer.

“The latest move is certainly a reflection of the clear shift in demand and supply fundamentals,” Timothy Moe, co-head of economics, commodities and strategy, told CNBC at Goldman Sachs’s strategy conference in London on Monday.

“This bear market will likely be characterized by more of a U-shaped recovery in which markets take longer to recover and will likely rebound to far lower price levels from where they sold off from,” Goldman said in a note dated Sunday.

Carbon Brief:

The global oil market is entering a new phase where cheap oil is failing to ignite growth in demand, the International Energy Agency (IEA) says.

Demand growth will remain sluggish because of fuel switching, more fuel-efficient cars, reduced oil subsidies and structural changes in the global economy, according to the  IEA’s Medium-Term Oil Market Report, published today.

Market dynamics suggest oil demand should increase strongly in response to  falling oil prices, which have halved since last summer. But the IEA argues oil markets are entering a “business-as-unusual” phase, where the usual rules of supply and demand have changed.

The IEA says:

“The recent price decline is expected to have only a marginal impact on global demand growth… Projections of oil-demand growth have been revised downwards, rather than upwards, since the price drop.”

This phase will see oil demand continue to grow at 1.2 per cent per year to 2020, well below the near-two per cent rate of growth before the global financial crisis. There a range of reasons for this shift.

The IEA says:

“Changing technologies and tightening environmental constraints are combining to create a ‘new age’ of lower oil demand growth and diminishing oil intensity, where less oil is required to produce a comparable amount of economic output.”

The chart below shows how global economic growth (purple line, below) has outpaced, and is expected to continue outpacing the growth in oil demand (blue line). The result is lower oil intensity (light blue bars, right hand axis), which is expecteded to fall by a third between 2008 and 2020.

oilintens

Oil demand is falling in rich nations because of ageing populations, improved city design, environmental rules, vehicle efficiency standards and structural shifts, such as the growth of online shopping. Fuel switching towards gas and electric vehicles are also a factor, the IEA says.

Emerging economies are more than offsetting demand reductions in rich nations, says the IEA. They will continue to do so, though the pace of growth will be slower than previously expected.

The idea that developing countries would follow the path taken by rich nations as they industrialised has been “proven wrong”, the IEA says. Instead, they are forging their own less oil-dependent path to development and “leap-frogging” old economic models.

The IEA says:

“One simply cannot extrapolate from past experience (historical patterns of oil demand versus GDP per capita in mature and newly industrialised economies) to project future demand from emerging markets. The broader technological and economic context has changed, and this changes everything.”

These shifts are particularly apparent in China, previously a key driver of increasing oil demand. The IEA says it has entered a new, less oil-intensive stage of development. Demand there is expected to grow at 2.6 per cent each year over the six years to 2020, roughly half the rate over the previous six years.

Ratchet effect

Chatham House oil expert John Mitchell tells Carbon Brief that sustained periods of high prices have historically caused irreversible reductions in oil demand via a ratchet effect. The IEA echoes this argument, saying lower oil demand caused by efficiency gains and structural economic shifts which are hard to undo.

The IEA says:

“Due to the legacy of years of sustained record-high oil prices, the world has become in general much less oil-intensive, and oil’s place in the fuel mix is eroding.”

 

5 Responses to “Despite Lower Prices, Oil Demand Flat. A New Normal?”

  1. redskylite Says:

    “This ain’t a normal correction, folks. This is an historic transition.”

    Coming from anyone else I would think them optimistic, but the words from someone who has been thinking about the problem for over 30 years, and now actively pursuing a remedy, I have a sense that we just might be entering a “whale oil” parallel.

    Certainly new generations of alternative energy sources are emerging and becoming available quickly, and today I read that a wind complex in Altamont is being upgraded to a new generation of more efficient, bird friendly turbines, and Google has a large interest in the project.

    Having worked for a major part of my life in the oil industry, in an enterprise that was jointly managed and operated by several oil companies, including BP, Mobil-Exxon, Total, Partex and Shell, I always found Shell by far the most advanced in technology and ideas.

    http://www.planetexperts.com/altamont-wind-farm-will-power-googleplex-next-20-years/


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