Deloitte: Oil demand growth will outlast ailing economy

An ailing global economy will stall oil demand growth for a while, but industry must prepare itself to fulfill long-term growing global oil demand, speakers said Dec. 10 at Deloitte's energy conference in the Woodlands, north of Houston.

Dec 10th, 2008

Paula Dittrick
Senior Staff Writer

THE WOODLANDS, Dec. 10 -- An ailing global economy will stall oil demand growth for a while, but industry must prepare itself to fulfill long-term growing global oil demand, speakers said Dec. 10 at Deloitte's energy conference in The Woodlands, north of Houston.

The Deutsche Bank (DB) economics team expects global gross domestic product growth to be nearly zero in 2009 and 2.6% in 2010, said Adam Sieminski, DB chief energy economist. He expects the current economic downturn to be the worst in 50 years.

Consumer demand in major industrial countries will be depressed for about 18 months, Sieminski said. Consequently, oil demand and oil prices are expected to suffer, although he remains optimistic about the long-term fundamentals for fossil fuels.

"By the end of next year, I think we will be out of the worst of this," Sieminski said of the global economic downturn.

DB revised its oil price forecast for 2009 to $47.50/bbl compared with an earlier forecast of $60/bbl.

"This forecast reflects the new, lower economic outlook and subsequent impact on global oil demand, which we see falling by 1% in 2009," Sieminski said. "Our 2010 forecast for an average West Texas Intermediate price of $55/bbl is at the low end of the consensus range. Our $80/bbl estimate for 2011 reflects a view that oil prices will sharply recover once the economy regains its footing."

He foresees support for US natural gas prices. "The US gas rig count is down 10% since the August peak, and we expect it will keep on falling."

OPEC's influence
Sieminski expects little to come out of the Dec. 17 meeting of the Organization of Petroleum Exporting Countries.

"OPEC isn't ahead of the game," Sieminski said. "They are just simply reacting. It will probably take a couple more meetings after this one," before OPEC takes action that would actually change the supply-demand situation.

Luis Giusti, senior advisor of the Center for Strategic and International Studies, expects OPEC to take action to stabilize prices. Noting that Saudi Arabia is building new cities, Giusti said he believes Saudi Arabia would like oil prices to be $60/bbl.

Giusti criticized OPEC's October meeting, calling it "sloppy" and saying nobody believed that OPEC actually was going to reduce production.

Regarding national oil companies and international oil companies, Giusti expects to see renewed partnerships in part because IOCs need access to reserves. He also believes that "a new era of cooperation" between NOCs and IOCs is needed to meet future oil demand.

Amy Jaffe of Rice University's James Baker Institute said NOCs are expected to control a greater portion of future oil production during the next 20 years but they will have difficulty fulfilling this role.

"Many NOCs have stagnant or falling oil production due to civil unrest, government interference, corruption, inefficiency, and diversion of capital to social spending," Jaffe said.

She said Middle East oil producers, particularly in Saudi Arabia, want to ensure long-term oil demand growth and therefore desire a shallow, short US recession.

Saudi Arabia figures predominantly in the international financial system, Jaffe said, adding that it's in the Saudis' interest to protect their extensive asset holdings worldwide.

The Saudis also would like to slow down a shift to more fuel-efficient cars because that will reduce oil demand, particularly in the US where robust fuel efficiency measures are expected. Development of the next generation of biofuels also could mean a further decline in US oil demand, Jaffe said.

Contact Paula Dittrick at paulad@ogjonline.com.

More in General Interest