Crude prices recently have been at record nominal levels and higher in real terms than during the 1973-74 energy crisis. But unlike its predecessors, the latest energy crisis is led by demand, not supply, said analysts at the Centre for Global Energy Studies in London.
In an Apr. 27 report, CGES analysts observed, "Oil's role in the world economy was much greater back then (8.3% of global GDP [gross domestic product] in 1973 vs. 5% in 2004) and, understandably, economic growth was hit hard and oil demand with it."
Moreover, they said, "Oil demand today, dominated as it is by the transport sector, is less price-sensitive than before and more susceptible to variations in growth. When economic growth in the Far East nosedived in 1998, it took oil demand down with it and pushed oil prices below $10/bbl, with a little unintended help from [the Organization of Petroleum Exporting Countries]. Last year the burgeoning global economy pulled oil demand the other way, causing oil prices to surge to record levels as spare capacity was squeezed below 2% of world oil demand."
Since the latest oil price spike is demand-led, the analysts said, demand growth must slow before prices will soften. One way for that to happen is for economic growth to slow, partly as a result of the price rise itself.
"However, the negative effect of high oil prices on economic growth is attenuated these days and will take a few years to have an impact anyway," said CGES analysts. "Likewise, the low price sensitivity of oil demand, the weak US dollar, and high taxes on oil in the developed world all help to shield oil demand from the worst effects of high crude oil prices," they said. "The implication is that oil prices will stay high for a while, unless the global economy suddenly grinds to a halt or Saudi Arabia, custodian of 86% of the world's spare capacity, chooses to open up its taps, thereby reducing excess capacity even further."
The outlook for future growth in China's demand for oil is of particular significance because of the dramatic impact of surging Chinese demand in 2004, which outran forecasts and required revisions to demand projections throughout the year. Initial projections underestimated Chinese oil demand by 10%, or 600,000 b/d"half of the world's unexpected incremental oil demand last year," CGES analysts said. "It is now believed that China's actual demand in 2004 amounted to 6.4 million b/d."
CGES estimated that global demand for oil totaled 82.5 million b/d in 2004. "Not since the heady days of the late 1970s has the demand for oil grown as rapidly in the space of a year as it did in 2004."
However, the dramatic 15.6% increase in China's oil consumption last year "was an aberration, caused largely by an imbalance between China's power generating capacity (most of which is coal-fired) and its demand for electricity," the CGES analysts said. To overcome power problems, China's central government introduced rolling blackouts and forced factories to operate in shifts in order to constrain demand. At the same time, it eased restrictions on the use of small diesel generators by both individuals and small factories.
The resulting jump in diesel consumption changed China from a net exporter of diesel to a net importer, with diesel imports up by 132,000 b/d in December 2004.
It's difficult to understand what drives Chinese demand for oil because it "has been and remains to a considerable degree a centrally planned and controlled economy, burdened with administered prices and possessingfor the time beingan undervalued exchange rate," said CGES analysts. "It is not easy to understand the extent to which energy prices in local currency terms reflect accurately the kind of pressures felt in the international energy markets."
Nevertheless, CGES said, "Continuation of economic growth at a rate slightly lower than the trend rate observed since 1985 yields oil demand increases of around 5% per annum and per capita oil consumption of 3.3 bbl/head in 2020 vs. 1.6 bbl/person in 2003. Exuberant economic growth of 9.6%/year and slow growth in real oil prices lead to a ballooning oil demand in China, boosting consumption by a massive 9.3 million b/d (or around 550,000 b/d/annum) between 2003 and 2020."
(Online Apr. 29, 2005; author's e-mail: email@example.com)