World oil demand trends 1986-2007

CGES | JUNE 2008 | SOURCE: Global Oil Insight

Consumption's ups and downs BP's recently published Statistical Review of World Energy provides us with a good excuse to have a peek at the trends exhibited by oil demand in various parts of the world. Oil demand is very much the flavour of the month these days because of the ultra high level reached by crude oil prices.

The question on everyone’s mind is whether oil consumption is responding to the dramatic oil price rises of the last few years, because if it is not, then the oil supply difficulties the world has been experiencing recently will keep oil prices on the boil.

It seems that oil demand is responding to high oil prices in the manner dictated by economic theory, but not in a similar fashion everywhere. In those oil-consuming countries with market economies, where the price faced by consumers tends to reflect to a greater or lesser degree (depending on tax rates) the observed increases in crude oil price, oil demand has indeed behaved as expected. However, in those countries where oil consumption is subsidised the oil demand seems impervious to the remarkable increases in international oil prices that we have witnessed of late.

We have chosen to examine the period since 1986, because that was the year in which the oil price increases of the 1970s finally unravelled. Moreover, by 1986 OPEC’s newly established policy of setting oil production quotas, instead of trying to maintain control of oil pricing via official government selling prices, was well established. Over the whole period since 1986 world oil consumption grew by 1.7% per annum or 1.17 mbpd each year (see Table 1), a time during which the price of oil averaged $33/bbl in constant '07 US dollars.

This aggregate figure of oil demand growth, however, masks a number of disparate trends. The Soviet Union collapsed in the early 1990s and its constituent nations — re-grouped as the Commonwealth of Independent States — took a long time to reform and restructure their economies.

Between 1986 and 1997, oil consumption in the former Soviet Union (FSU) declined by 0.4 mbpd per annum, but by the mid-2000s oil consumption in the FSU was growing once more. China’s oil demand grew relatively slowly in the period till 1997, but accelerated thereafter, rising till the peak consumption year of 2004 at the same incremental rate (of 370,000 bpd a year) as oil consumption in the whole of the OECD and 23% more than the USA’s annual incremental oil demand growth.

Although the average real price of oil during the period 1998 to 2004 was almost the same as in the earlier period, oil demand growth in the market economies of the developed world was markedly lower, apart from the United States. Incremental oil consumption in the EU almost halved in the years 1998-2004, as Europe began to get to grips with the CO 2 reduction targets it was set in Kyoto, while oil demand in the OECD more than halved.

However, the most interesting period is the one since 2004. In the three years since that year of peak global oil consumption growth of 3.9% the price of oil has soared in real terms, averaging $62/bbl in 2007 US dollars and causing oil consumption in the market-led economies to contract. In the EU and the OECD group of countries oil demand fell by around 60,000 bpd a year, and in the USA by 11,000 bpd per annum.

By contrast, oil demand growth in China was hardly affected by the surge in oil prices, while in the OPEC member-states oil consumption grew at a faster rate than before (240,000 bpd per annum versus 169,000 bpd a year in the period 1998-2004).

In both China and the nations of OPEC oil use is subsidised, particularly so in OPEC’s Gulf members and Venezuela, so it should come as no great surprise that oil consumption in both areas was untouched by ballooning oil prices.

If one excludes from annual incremental world oil demand the increases in consumption in the former centrally-planned economies (i.e., the FSU, China and communist Eastern Europe) and the OPEC countries, then one notices that oil demand growth has indeed been hit hard by high oil prices.

Incremental oil demand growth in the former non-communist world, excluding the OPEC countries, declined from 1.3 mbpd per year in the period 1986-97 to 0.7 mbpd a year from 1998 to 2004, and then down to a mere 0.3 mbpd per annum between 2005 and 2007.

Oil's share in primary energy

An examination of some of the other energy data in BP's latest Statistical Review reveals that oil’s share in global primary energy demand continued to decline in 2007 (see Figure 1). Oil’s global share now stands at 35.6%, down from 36.1% last year and 38.3% in 2001. Nevertheless, oil still remains the world's premier fuel, with coal second at 28.6% and gas third at 23.8%.

Because natural gas pricing is linked to oil prices, natural gas’ share in primary energy has been more or less static since the year 2000 as oil has become more expensive, whereas coal has gained market share from oil. It is certainly ironical that at a time when people are increasingly concerned about the rise in CO 2 emissions, coal should be gaining market share at the expense of oil.

Coal’s relatively strong performance is due to its dominant position in China’s and India's energy mix (70% and 51% of primary energy respectively in 2007) and these two countries’ rapid rate of growth of primary energy (7.7% and 6.8% per annum last year). Coal’s share of primary energy is high in Australia too (44% in 2007), but primary energy consumption fell last year in Australia by 1.6% and stayed static in Poland, another country with a high share of coal in primary energy (61%).

Oil’s share in primary energy was surprisingly high in a number of countries last year. In Mexico it was 57%, in Belgium & Luxembourg 56%, in Denmark 51%, in Greece 64%, in Italy 46%, in the Netherlands 53%, in Portugal 60%, in Spain 52%, in the Philippines 56%, in South Korea and Taiwan 46%, in Thailand 50% and finally in Japan 44%.

Oil’s share in primary energy is clearly on a downward trend, but oil remains for the time being the world’s most important form of energy and in many countries it accounts for more than half of aggregate fuel use. Oil’s real importance, though, lies not in its share of primary energy demand, but in its primacy in certain key sectors of the global economy.

Somewhere between a half and three quarters of all oil is used for transportation, while 80-95% of all the world’s transport is fuelled by oil and 95% of all goods in shops are delivered in oil-burning vehicles. Almost all petrochemicals are produced from oil and the production of 99% of the world’s food requires oil or gas for fertilisers, agrochemicals, tilling, cultivation and transport.

Although oil may no longer elicit the world’s admiration, it still commands the world’s respect.

For more information on world oil demand, subscribe to the Quarterly Oil Demand Report