Oil demand outlook depends more than usual on politics

Feb. 4, 2013
Forecasts of global demand for oil, always sensitive to economic fate, weather, and geopolitical surprise, are especially fragile this year. Economic growth depends extraordinarily much on another wild variable: politics.

Forecasts of global demand for oil, always sensitive to economic fate, weather, and geopolitical surprise, are especially fragile this year. Economic growth depends extraordinarily much on another wild variable: politics.

In its World Economic Outlook in October, the International Monetary Fund predicted economic growth in 2013 of 3.6%, saying the outlook depended on financial reform in Europe and the US.

For Europe, the IMF prescribed banking union, among other things, as essential to restoration of the euro. In December, authorities centralized supervision of large eurozone banks.

And for the US, the IMF in October called for resolution of the budgetary impasse then pushing the country toward the so-called fiscal cliff. This month, budget negotiators reached an agreement that deferred scheduled tax increases and whacks to federal programs.

In each case, however, the move addressed just the most urgent piece of the problem while delaying action on the rest. Many observers see supervision of financial institutions by the European Central Bank as essential to ending the euro crisis but not the whole solution.

And deep divisions remain in the US over fiscal policy, ensuring encounters with further precipices.

Obviously, the IMF thinks the EU and US have only sipped economic medicine they need in much larger doses.

In its January WEO update, the group shaved its forecast for economic growth this year to 3.5%. While still stronger than the 3.2% growth of 2012, the trimming comes despite steps taken toward the political changes for which the IMF appealed last fall.

Although prospects for "a sharp crisis" have subsided, the IMF says now, "downside risks remain significant, including prolonged stagnation in the euro area and excessive short-term fiscal tightening in the United States."

Still ahead, IMF says, are continued fiscal adjustment in distressed European countries and agreement in the US of "a medium-term fiscal consolidation plan, focused on entitlement and tax reform."

These will be tough political fights, the outcomes of which will greatly influence oil demand. And they're impossible to predict.