Hey Oil Market: Forget About OPEC for a Second
The oil market's attention is focused overwhelmingly on figuring out which OPEC member is going to cut what. The bigger question it shouldn't lose sight of is this: Who will replace China?
Looking back over 50 years, oil demand has gone through three broad phases: pre-1970s industrialization in the OECD countries, retrenchment after the oil shocks, and then renewed growth through 2015. If the International Energy Agency's latest long-range forecasts are right, then we stand on the edge of another slowdown in demand growth -- a big one.
Beneath those headline numbers, though, leadership in global oil-demand growth has been passed around like an Olympic torch. Here, we've broken down average demand growth in each decade by region:
Until the early years of the 21st century, the OECD ruled the roost, even during the post-oil-shock squeeze. In the years before the 1980s, this reflected broad-based economic growth in the U.S., Western Europe and Japan. The resurgence of the 1990s was more lopsided, owing much to North America's SUV boom.
All that flipped on its head after 2005. The decade just ended was all about China. Directly, it accounted for almost 40 percent of the growth in oil demand. Indirectly, the high oil prices this spawned jolted the economies of exporting regions such as the Middle East. Even the countries of the former Soviet Union were flipped back to increased oil demand after years of decline.
Looking at the IEA's forecast, though, the OECD's drag on global oil demand growth looks set to deepen: At 4.2 million barrels a day, the projected decline in the decade through 2025 almost offsets the 4.5 million-barrel-a-day increase in average Chinese demand over the past decade. 1
Looking back to what happened in the decade ending in 1985, it makes sense that demand growth should slow sharply after the price spikes of recent years. This time, however, a mixture of efficiency gains, penetration of electric vehicles, and slower economic growth due to unfavorable demographic trends mean a 1990s rebound in OECD oil demand isn't in the cards.
China remains the biggest single source of demand growth, but at a much slower pace compared to the supercycle of the past decade. The burden of supporting higher demand thus begins to pass to India, along with a coalition made up of other industrializing bits of Asia and continued growth in the Middle East. Africa is also expected to play its part, although the "Rest of World" part of the charts above isn't straightforward: A big chunk of the projected growth from 2015 onward refers to international shipping and jet demand, rather than specific regions, due to how the IEA segments its forecasts.
This is a more diffuse picture than in previous decades; the torch passes to many hands rather than one clear leader. What unites them all, though, is that they are emerging economies more dependent on global trade -- for which the signs were not favorable even before the election of a U.S. president who is, rhetorically anyway, not averse to risking a trade war with China. Middle Eastern oil-demand growth, meanwhile, is tied heavily to global oil-demand growth.
Leaving the economic risks aside, oil bulls should note some other consequences of oil demand shifting eastward. In a report published earlier this year by Trusted Sources, an emerging-markets research firm based in London, analyst Kingsmill Bond pointed out that energy-demand growth in general is now centered on parts of the world that have good reasons not to necessarily retread the West's path but seek a bigger role for renewable energy and electric vehicles.
One reason for this is pollution, with Indian cities in particular featuring prominently at the top of global rankings of lung-busting urban sprawls.
Another is geopolitics: A recurring feature of the past 50 years has been America's swings between anxiety and exultation around the nebulous concept of energy independence. Reliance on oil imports, in particular, has been viewed as an Achilles heel, and shale resources have been hailed by many as a strategic advantage, not merely a source of energy.
Having peaked at 60 percent of oil consumption in 2005, U.S. imports accounted for just 24 percent of total consumption last year (weaker demand also played a role). China and India, on the other hand, are projected to become way more dependent on the kindness of (oil-producing) strangers than the U.S. ever was:
Beijing and New Delhi may be just fine with deeper involvement in a fractious Middle East, including the expense of building navies to protect far-flung sea lanes and all the other stuff the U.S. has done to keep oil flowing since World War II. Here's guessing, though, that the future won't simply repeat the past.
All IEA projections reflect the agency's "New Policies" scenario (see this for more details).
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