Economic spurt may not give oil use a normal push

Bob Tippee
Editor

Under normal circumstances, enlarged expectations for a recovering global economy would be good news for oil markets. But what, nowadays, is normal?

The International Monetary Fund on July 8 raised its estimate for world economic growth this year to 4.6% from its April projection of 4.2%.

In a regular update of its World Economic Outlook, the IMF said growth would be, as usual, irregular. It expects economies to grow by 3.25% in the US, 1% in the euro area, 2.5% in Japan, and 6.75% in developing countries.

For 2011, IMF projects a slowing of the global growth rate to 4.3%.

The organization also warned of the need for governments to balance economic stimulation with fiscal responsibility.

It issued a separate report of the US economy in which it attributed recovery to “a powerful and effective policy response” but called for “a credible fiscal strategy to ensure that public debt is put—and is seen to be put—on a sustainable path without putting the recovery in jeopardy.”

Because oil demand tends to follow economic activity, IMF outlooks are important. The International Energy Agency uses them as economic assumptions in its monthly market reports.

The Centre for Global Energy Studies, however, offers reasons to be wary.

The London group believes growth might undershoot IMF expectations because of austerity measures in Europe and relaxation of fiscal stimulus in China.

CGES notes economic growth isn’t the only influence on oil demand in high-growth developing countries.

Until now, governments have capped fuel prices, shielding consumers from incentives to conserve energy in periods of rising prices.

But India, with its rapidly growing oil market, has ended subsidies for gasoline and is phasing them out for diesel fuel. India may become a model for other countries finding fuel subsidization an impossible fiscal burden.

In those countries, economic and price effects will combine to frustrate demand expectations.

Retreat from price subsidization will proceed at an unpredictable pace.

“But it is likely to be something the oil market will increasingly focus on, given that [developed-world] oil demand has been stagnating for a long time now,” CGES says.

(Online July 9, 2010; author’s e-mail: bobt@ogjonline.com)

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