Oil demand flattens as prices spike

DAVID BLAIR | MAY 2011 | SOURCE: FT.com

World demand for oil is flatlining for the first time since 2009 as high prices hit American consumers, the International Energy Agency has said.

The evidence that petrol prices close to $4 per gallon are beginning to cut consumption in North America came as Democratic senators and chief executives from the leading oil companies clashed in a sometimes bad-tempered hearing in the US Senate.

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The IEA, the rich countries’ energy watchdog, said global oil consumption was almost flat in March, rising just 0.4 per cent compared with a year earlier, representing the smallest increase since mid-2009.

In developed countries, total demand fell by 2.8 per cent.

The IEA cautioned that this was affected by the Easter holidays and “exceptional events”, notably the earthquake in Japan.

Nonetheless, the report noted “weaker prospects for North America, where high oil prices may have finally begun to dent oil demand”.

The IEA predicts total oil consumption in North America will fall by 194,000 barrels per day in 2011. Last year, by contrast, oil product demand in North America rose by 609,000 b/d. The IEA believes world oil prices will probably stay high, at about $110 this year, compared with $80 in 2010.

Testifying before the Senate finance committee on Thursday, the CEOs of the five largest oil companies in the US warned that a plan backed by many Democrats to cut tax breaks for the industry would discourage investment in new sources of supply, which some said would push US fuel prices higher.

John Watson, chief executive of Chevron, added that ending the tax breaks would “mean fewer dollars to state and federal treasuries, and fewer jobs, all while our economic recovery remains fragile, and America needs all three”.

Speaking after he came out of the hearing, Marvin Odum, the head of oil and gas production in the Americas for Royal Dutch Shell, said it was “disappointing” that the debate was focused on “such a narrow part of the tax code, when the energy industry offers such a huge opportunity to America, both financially and in terms of energy security”.

He joined the other CEOs in urging the US authorities to ease the constraints on oil drilling, including the objections that have prevented Shell from drilling in the Arctic.

Mary Landrieu, a Democratic senator from Louisiana, which is heavily reliant on the oil and gas industry, was not at the hearing, but said the attempt to end tax breaks for oil and gas companies had “no chance” of passing through Congress.

The IEA forecasts that total oil product demand in industrialised countries will fall this year by 230,000 b/d, a decline of 0.5 per cent, while growth in the developing world will be 1.5m b/d, a rise of 3.6 per cent. This would translate into global demand growth of 1.5 per cent this year, less than half of the 3.3 per cent in 2010.

The maintenance season for European refineries is drawing to a close, opening a period when demand for crude normally rises. The IEA said this usually climbs by about 1.6m b/d between second and third quarters.

“Underlying all this is the fundamental tightening of the market which began in the second half of last year,” said Leonidas Drollas, chief economist of the Centre for Global Energy Studies.

Opec’s failure to increase production after last year’s rise in oil demand was a “key error”, Mr Drollas said. The cartel compounded the situation by declining to make up all the shortfall left by the loss of Libyan oil output. Mr Drollas said the market would “still be tight”, even allowing for slowing demand.

Opec’s total production has fallen by 1.3m b/d since the onset of Libya’s crisis in February. The cartel is thought unlikely to agree an output increase when it meets on June 8 in Vienna.

Related article: Oil price forecast for 2011

For detailed oil market forecasts, take a look at the Annual Review 2011